QES Group Berhad (KLSE:QES) has had a great run on the share market with its stock up by a significant 38% over the last three months. 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. In this article, we decided to focus on QES Group Berhad's ROE.
Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
See our latest analysis for QES Group Berhad
How To Calculate Return On Equity?
ROE 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 QES Group Berhad is:
17% = RM26m ÷ RM157m (Based on the trailing twelve months to September 2022).
The 'return' is the yearly profit. One way to conceptualize this is that for each MYR1 of shareholders' capital it has, the company made MYR0.17 in profit.
What Is The Relationship Between ROE And Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.
QES Group Berhad's Earnings Growth And 17% ROE
To start with, QES Group Berhad's ROE looks acceptable. And on comparing with the industry, we found that the the average industry ROE is similar at 14%. Consequently, this likely laid the ground for the impressive net income growth of 20% seen over the past five years by QES Group Berhad. We reckon that there could also be other factors at play here. For instance, the company has a low payout ratio or is being managed efficiently.
We then compared QES Group Berhad's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 13% in the same period.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. If you're wondering about QES Group Berhad's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.