Sarawak Plantation Berhad's (KLSE:SWKPLNT) stock is up by a considerable 8.9% over the past month. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. Particularly, we will be paying attention to Sarawak Plantation 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. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
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How To Calculate Return On Equity?
The formula for return on equity is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Sarawak Plantation Berhad is:
12% = RM93m ÷ RM784m (Based on the trailing twelve months to December 2024).
The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each MYR1 of shareholders' capital it has, the company made MYR0.12 in profit.
See our latest analysis for Sarawak Plantation Berhad
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 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.
Sarawak Plantation Berhad's Earnings Growth And 12% ROE
To begin with, Sarawak Plantation Berhad seems to have a respectable ROE. Further, the company's ROE compares quite favorably to the industry average of 9.1%. This probably laid the ground for Sarawak Plantation Berhad's moderate 8.3% net income growth seen over the past five years.
Next, on comparing with the industry net income growth, we found that Sarawak Plantation Berhad's reported growth was lower than the industry growth of 15% over the last few years, which is not something we like to see.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Sarawak Plantation Berhad is trading on a high P/E or a low P/E, relative to its industry.