Cape EMS Berhad (KLSE:CEB) has had a great run on the share market with its stock up by a significant 10% over the last month. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. Particularly, we will be paying attention to Cape EMS Berhad's ROE today.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Put another way, it reveals the company's success at turning shareholder investments into profits.
View our latest analysis for Cape EMS 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 Cape EMS Berhad is:
13% = RM48m ÷ RM382m (Based on the trailing twelve months to September 2023).
The 'return' is the income the business earned over the last year. So, this means that for every MYR1 of its shareholder's investments, the company generates a profit of MYR0.13.
What Has ROE Got To Do With Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.
Cape EMS Berhad's Earnings Growth And 13% ROE
To begin with, Cape EMS Berhad seems to have a respectable ROE. And on comparing with the industry, we found that the the average industry ROE is similar at 12%. This probably goes some way in explaining Cape EMS Berhad's significant 38% net income growth over the past five years amongst other factors. We reckon that there could also be other factors at play here. Such as - high earnings retention or an efficient management in place.
Next, on comparing with the industry net income growth, we found that Cape EMS Berhad's growth is quite high when compared to the industry average growth of 22% in the same period, which is great to see.
Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Cape EMS Berhad fairly valued compared to other companies? These 3 valuation measures might help you decide.