With its stock down 6.3% over the past three months, it is easy to disregard SSF Home Group Berhad (KLSE:SSF). To decide if this trend could continue, we decided to look at its weak fundamentals as they shape the long-term market trends. Specifically, we decided to study SSF Home Group Berhad's ROE in this article.
Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.
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How Do You 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 SSF Home Group Berhad is:
3.9% = RM6.2m ÷ RM160m (Based on the trailing twelve months to January 2025).
The 'return' is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each MYR1 of shareholders' capital it has, the company made MYR0.04 in profit.
View our latest analysis for SSF Home Group Berhad
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. 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 SSF Home Group Berhad's Earnings Growth And 3.9% ROE
It is quite clear that SSF Home Group Berhad's ROE is rather low. Not just that, even compared to the industry average of 9.3%, the company's ROE is entirely unremarkable. For this reason, SSF Home Group Berhad's five year net income decline of 19% is not surprising given its lower ROE. However, there could also be other factors causing the earnings to decline. Such as - low earnings retention or poor allocation of capital.
However, when we compared SSF Home Group Berhad's growth with the industry we found that while the company's earnings have been shrinking, the industry has seen an earnings growth of 22% in the same period. This is quite worrisome.