Radiant Globaltech Berhad (KLSE:RGTECH) has had a great run on the share market with its stock up by a significant 13% over the last month. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. In this article, we decided to focus on Radiant Globaltech Berhad's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

See our latest analysis for Radiant Globaltech Berhad

How Is ROE Calculated?

Return on equity can be calculated by using the formula:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Radiant Globaltech Berhad is:

11% = RM8.1m ÷ RM74m (Based on the trailing twelve months to December 2023).

The 'return' is the yearly profit. One way to conceptualize this is that for each MYR1 of shareholders' capital it has, the company made MYR0.11 in profit.

What Is The Relationship Between ROE And Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

A Side By Side comparison of Radiant Globaltech Berhad's Earnings Growth And 11% ROE

On the face of it, Radiant Globaltech Berhad's ROE is not much to talk about. Yet, a closer study shows that the company's ROE is similar to the industry average of 9.9%. Moreover, we are quite pleased to see that Radiant Globaltech Berhad's net income grew significantly at a rate of 21% over the last five years. Given the slightly low ROE, it is likely that there could be some other aspects that are driving this growth. For instance, the company has a low payout ratio or is being managed efficiently.

We then performed a comparison between Radiant Globaltech Berhad's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 21% in the same 5-year period.

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. Is Radiant Globaltech Berhad fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Radiant Globaltech Berhad Using Its Retained Earnings Effectively?

Radiant Globaltech Berhad has a three-year median payout ratio of 35% (where it is retaining 65% of its income) which is not too low or not too high. So it seems that Radiant Globaltech Berhad is reinvesting efficiently in a way that it sees impressive growth in its earnings (discussed above) and pays a dividend that's well covered.

Additionally, Radiant Globaltech Berhad has paid dividends over a period of four years which means that the company is pretty serious about sharing its profits with shareholders.

Conclusion

Overall, we feel that Radiant Globaltech Berhad certainly does have some positive factors to consider. With a high rate of reinvestment, albeit at a low ROE, the company has managed to see a considerable growth in its earnings. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. To know the 1 risk we have identified for Radiant Globaltech Berhad visit our risks dashboard for free.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.