Most readers would already be aware that Sunway Construction Group Berhad's (KLSE:SUNCON) stock increased significantly by 12% over the past three months. As most would know, fundamentals are what usually guide market price movements over the long-term, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. Particularly, we will be paying attention to Sunway Construction Group Berhad's ROE today.
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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
View our latest analysis for Sunway Construction Group Berhad
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 Sunway Construction Group Berhad is:
15% = RM131m ÷ RM852m (Based on the trailing twelve months to June 2023).
The 'return' is the yearly profit. So, this means that for every MYR1 of its shareholder's investments, the company generates a profit of MYR0.15.
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. 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.
Sunway Construction Group Berhad's Earnings Growth And 15% ROE
To start with, Sunway Construction Group Berhad's ROE looks acceptable. Especially when compared to the industry average of 6.0% the company's ROE looks pretty impressive. However, we are curious as to how the high returns still resulted in flat growth for Sunway Construction Group Berhad in the past five years. We reckon that there could be some other factors at play here that's limiting the company's growth. These include low earnings retention or poor allocation of capital.
As a next step, we compared Sunway Construction Group Berhad's performance with the industry and discovered the industry has shrunk at a rate of 3.4% in the same period meaning that the company has been shrinking its earnings at a rate lower than the industry. While this is not particularly good, its not particularly bad either.