Spritzer Bhd's (KLSE:SPRITZER) stock is up by a considerable 11% over the past three months. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. Specifically, we decided to study Spritzer Bhd's ROE in this article.
ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.
View our latest analysis for Spritzer Bhd
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 Spritzer Bhd is:
8.4% = RM42m ÷ RM500m (Based on the trailing twelve months to June 2023).
The 'return' refers to a company's earnings over the last year. That means that for every MYR1 worth of shareholders' equity, the company generated MYR0.08 in profit.
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. 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 Spritzer Bhd's Earnings Growth And 8.4% ROE
At first glance, Spritzer Bhd's ROE doesn't look very promising. A quick further study shows that the company's ROE doesn't compare favorably to the industry average of 18% either. Spritzer Bhd was still able to see a decent net income growth of 6.2% over the past five years. We reckon that there could be other factors at play here. For instance, the company has a low payout ratio or is being managed efficiently.
Next, on comparing Spritzer Bhd's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 6.2% over the last few years.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Spritzer Bhd fairly valued compared to other companies? These 3 valuation measures might help you decide.