Most readers would already be aware that TT Vision Holdings Berhad's (KLSE:TTVHB) stock increased significantly by 30% over the past three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. In this article, we decided to focus on TT Vision Holdings 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. Put another way, it reveals the company's success at turning shareholder investments into profits.
Check out our latest analysis for TT Vision Holdings 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 TT Vision Holdings Berhad is:
11% = RM11m ÷ RM102m (Based on the trailing twelve months to December 2023).
The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each MYR1 of shareholders' capital it has, the company made MYR0.11 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. 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 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.
TT Vision Holdings Berhad's Earnings Growth And 11% ROE
At first glance, TT Vision Holdings Berhad's ROE doesn't look very promising. However, the fact that the company's ROE is higher than the average industry ROE of 7.0%, is definitely interesting. Particularly, the substantial 50% net income growth seen by TT Vision Holdings Berhad over the past five years is impressive . That being said, the company does have a slightly low ROE to begin with, just that it is higher than the industry average. Hence, there might be some other aspects that are causing earnings to grow. For example, it is possible that the broader industry is going through a high growth phase, or that the company has a low payout ratio.
We then compared TT Vision Holdings Berhad's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 15% in the same 5-year period.