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Most readers would already be aware that Berjaya Food Berhad's (KLSE:BJFOOD) stock increased significantly by 24% over the past month. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Particularly, we will be paying attention to Berjaya Food Berhad's ROE today.
ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
View our latest analysis for Berjaya Food Berhad
How Do You Calculate Return On Equity?
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 Berjaya Food Berhad is:
26% = RM126m ÷ RM480m (Based on the trailing twelve months to March 2023).
The 'return' is the profit over the last twelve months. That means that for every MYR1 worth of shareholders' equity, the company generated MYR0.26 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. 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.
Berjaya Food Berhad's Earnings Growth And 26% ROE
Firstly, we acknowledge that Berjaya Food Berhad has a significantly high ROE. Additionally, the company's ROE is higher compared to the industry average of 4.2% which is quite remarkable. As a result, Berjaya Food Berhad's exceptional 54% net income growth seen over the past five years, doesn't come as a surprise.
When you consider the fact that the industry earnings have shrunk at a rate of 6.7% in the same 5-year period, the company's net income growth is pretty remarkable.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. Is Berjaya Food Berhad fairly valued compared to other companies? These 3 valuation measures might help you decide.