It is hard to get excited after looking at Taliworks Corporation Berhad's (KLSE:TALIWRK) recent performance, when its stock has declined 5.0% over the past three months. We decided to study the company's financials to determine if the downtrend will continue as the long-term performance of a company usually dictates market outcomes. Specifically, we decided to study Taliworks Corporation 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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.
View our latest analysis for Taliworks Corporation 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 Taliworks Corporation Berhad is:
4.9% = RM51m ÷ RM1.1b (Based on the trailing twelve months to September 2022).
The 'return' is the income the business earned over the last year. That means that for every MYR1 worth of shareholders' equity, the company generated MYR0.05 in profit.
Why Is ROE Important For Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.
Taliworks Corporation Berhad's Earnings Growth And 4.9% ROE
It is quite clear that Taliworks Corporation Berhad's ROE is rather low. Not just that, even compared to the industry average of 9.1%, the company's ROE is entirely unremarkable. Therefore, it might not be wrong to say that the five year net income decline of 2.0% seen by Taliworks Corporation Berhad was possibly a result of it having a lower ROE. We reckon that there could also be other factors at play here. For example, the business has allocated capital poorly, or that the company has a very high payout ratio.
Next, on comparing with the industry net income growth, we found that Taliworks Corporation Berhad's earnings seems to be shrinking at a similar rate as the industry which shrunk at a rate of a rate of 2.0% in the same period.
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). This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Taliworks Corporation Berhad's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.