Scientex Berhad's (KLSE:SCIENTX) stock is up by a considerable 9.6% 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. In this article, we decided to focus on Scientex Berhad's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Put another way, it reveals the company's success at turning shareholder investments into profits.

View our latest analysis for Scientex Berhad

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 Scientex Berhad is:

13% = RM438m ÷ RM3.4b (Based on the trailing twelve months to October 2022).

The 'return' is the profit over the last twelve months. That means that for every MYR1 worth of shareholders' equity, the company generated MYR0.13 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. 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. 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.

Scientex Berhad's Earnings Growth And 13% ROE

To begin with, Scientex Berhad seems to have a respectable ROE. Further, the company's ROE compares quite favorably to the industry average of 8.6%. This probably laid the ground for Scientex Berhad's moderate 12% net income growth seen over the past five years.

As a next step, we compared Scientex Berhad's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 23% in the same period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. What is SCIENTX worth today? The intrinsic value infographic in our free research report helps visualize whether SCIENTX is currently mispriced by the market.