Most readers would already be aware that Seng Fong Holdings Berhad's (KLSE:SENFONG) stock increased significantly by 43% over the past three months. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. In this article, we decided to focus on Seng Fong Holdings Berhad's ROE.
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.
Check out our latest analysis for Seng Fong Holdings Berhad
How To Calculate Return On Equity?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Seng Fong Holdings Berhad is:
17% = RM33m ÷ RM194m (Based on the trailing twelve months to December 2023).
The 'return' is the income the business earned over the last year. Another way to think of that is that for every MYR1 worth of equity, the company was able to earn MYR0.17 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. 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.
Seng Fong Holdings Berhad's Earnings Growth And 17% ROE
To begin with, Seng Fong Holdings Berhad seems to have a respectable ROE. Further, the company's ROE compares quite favorably to the industry average of 5.3%. This certainly adds some context to Seng Fong Holdings Berhad's decent 8.1% net income growth seen over the past five years.
As a next step, we compared Seng Fong Holdings Berhad's net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 7.7% in the same period.
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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Seng Fong Holdings Berhad fairly valued compared to other companies? These 3 valuation measures might help you decide.