Most readers would already be aware that SDS Group Berhad's (KLSE:SDS) stock increased significantly by 5.7% 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. Specifically, we decided to study SDS Group Berhad's ROE in this article.
Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.
Check out our latest analysis for SDS Group Berhad
How Do You 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 SDS Group Berhad is:
24% = RM25m ÷ RM106m (Based on the trailing twelve months to June 2023).
The 'return' is the profit over the last twelve months. One way to conceptualize this is that for each MYR1 of shareholders' capital it has, the company made MYR0.24 in profit.
What Has ROE Got To Do With Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. 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. 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 SDS Group Berhad's Earnings Growth And 24% ROE
To begin with, SDS Group Berhad has a pretty high ROE which is interesting. Second, a comparison with the average ROE reported by the industry of 7.6% also doesn't go unnoticed by us. So, the substantial 49% net income growth seen by SDS Group Berhad over the past five years isn't overly surprising.
Next, on comparing with the industry net income growth, we found that SDS Group Berhad's growth is quite high when compared to the industry average growth of 23% in the same period, which is great to see.
Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about SDS Group Berhad's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.