Scientex Berhad's (KLSE:SCIENTX) stock up by 1.9% over the past three months. Given its impressive performance, we decided to study the company's key financial indicators as a company's long-term fundamentals usually dictate market outcomes. Particularly, we will be paying attention to Scientex 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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
See our latest analysis for Scientex 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 Scientex Berhad is:
13% = RM534m ÷ RM4.0b (Based on the trailing twelve months to April 2024).
The 'return' is the yearly profit. Another way to think of that is that for every MYR1 worth of equity, the company was able to earn MYR0.13 in profit.
What Has ROE Got To Do With Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.
A Side By Side comparison of Scientex Berhad's Earnings Growth And 13% ROE
To start with, Scientex Berhad's ROE looks acceptable. Especially when compared to the industry average of 5.3% the company's ROE looks pretty impressive. This probably laid the ground for Scientex Berhad's moderate 7.1% net income growth seen over the past five years.
Next, on comparing Scientex Berhad's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 7.1% over the last few years.
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 Scientex Berhad fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is Scientex Berhad Making Efficient Use Of Its Profits?
Scientex Berhad has a three-year median payout ratio of 33%, which implies that it retains the remaining 67% of its profits. This suggests that its dividend is well covered, and given the decent growth seen by the company, it looks like management is reinvesting its earnings efficiently.