It is hard to get excited after looking at Sunzen Biotech Berhad's (KLSE:SUNZEN) recent performance, when its stock has declined 6.8% over the past three months. We, however decided to study the company's financials to determine if they have got anything to do with the price decline. Long-term fundamentals are usually what drive market outcomes, so it's worth paying close attention. In this article, we decided to focus on Sunzen Biotech Berhad's ROE.
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.
Check out our latest analysis for Sunzen Biotech Berhad
How Do You Calculate Return On Equity?
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 Sunzen Biotech Berhad is:
3.6% = RM4.6m ÷ RM129m (Based on the trailing twelve months to September 2022).
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 MYR0.04 in profit.
What Has ROE Got To Do With 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 all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.
Sunzen Biotech Berhad's Earnings Growth And 3.6% ROE
It is hard to argue that Sunzen Biotech Berhad's ROE is much good in and of itself. Not just that, even compared to the industry average of 9.8%, the company's ROE is entirely unremarkable. For this reason, Sunzen Biotech Berhad's five year net income decline of 9.3% is not surprising given its lower ROE. However, there could also be other factors causing the earnings to decline. For instance, the company has a very high payout ratio, or is faced with competitive pressures.
However, when we compared Sunzen Biotech 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 2.5% in the same period. This is quite worrisome.