SBH Marine Holdings Berhad's (KLSE:SBH) stock is up by a considerable 8.2% over the past week. However, we wonder if the company's inconsistent financials would have any adverse impact on the current share price momentum. In this article, we decided to focus on SBH Marine Holdings 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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
Check out our latest analysis for SBH Marine Holdings 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 SBH Marine Holdings Berhad is:
3.6% = RM4.6m ÷ RM129m (Based on the trailing twelve months to September 2024).
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 MYR0.04.
What Is The Relationship Between ROE And Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. 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. 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 SBH Marine Holdings Berhad's Earnings Growth And 3.6% ROE
It is quite clear that SBH Marine Holdings Berhad's ROE is rather low. Not just that, even compared to the industry average of 9.2%, the company's ROE is entirely unremarkable. Therefore, it might not be wrong to say that the five year net income decline of 4.8% seen by SBH Marine Holdings Berhad was possibly a result of it having a lower ROE. However, there could also be other factors causing the earnings to decline. For example, the business has allocated capital poorly, or that the company has a very high payout ratio.
That being said, we compared SBH Marine Holdings Berhad's performance with the industry and were concerned when we found that while the company has shrunk its earnings, the industry has grown its earnings at a rate of 19% in the same 5-year period.
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. This then helps them determine if the stock is placed for a bright or bleak future. Is SBH Marine Holdings Berhad fairly valued compared to other companies? These 3 valuation measures might help you decide.