UMS Holdings (SGX:558) has had a rough week with its share price down 5.6%. However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. Particularly, we will be paying attention to UMS Holdings' ROE today.
Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.
See our latest analysis for UMS Holdings
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 UMS Holdings is:
26% = S$99m ÷ S$387m (Based on the trailing twelve months to March 2023).
The 'return' is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each SGD1 of shareholders' capital it has, the company made SGD0.26 in profit.
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.
UMS Holdings' Earnings Growth And 26% ROE
First thing first, we like that UMS Holdings has an impressive ROE. Further, even comparing with the industry average if 24%, the company's ROE is quite respectable. Therefore, it looks like the high ROE is what probably supported UMS Holdings' modest 16% growth over the past five years.
Next, on comparing with the industry net income growth, we found that UMS Holdings' reported growth was lower than the industry growth of 28% in the same period, which is not something we like to see.
Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about UMS Holdings''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.