Sim Leisure Group's (Catalist:URR) stock up by 2.7% over the past month. 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. Specifically, we decided to study Sim Leisure Group's ROE in this article.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.
View our latest analysis for Sim Leisure Group
How Do You 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 Sim Leisure Group is:
29% = RM28m ÷ RM95m (Based on the trailing twelve months to June 2023).
The 'return' is the income the business earned over the last year. That means that for every SGD1 worth of shareholders' equity, the company generated SGD0.29 in profit.
What Is The Relationship Between ROE And Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.
Sim Leisure Group's Earnings Growth And 29% ROE
Firstly, we acknowledge that Sim Leisure Group has a significantly high ROE. Second, a comparison with the average ROE reported by the industry of 6.4% also doesn't go unnoticed by us. Under the circumstances, Sim Leisure Group's considerable five year net income growth of 37% was to be expected.
Next, on comparing with the industry net income growth, we found that the growth figure reported by Sim Leisure Group compares quite favourably to the industry average, which shows a decline of 8.5% over the last few years.
Earnings growth is an important metric to consider when valuing a stock. 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. If you're wondering about Sim Leisure Group's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.