In This Article:
It is hard to get excited after looking at UMS Holdings' (SGX:558) recent performance, when its stock has declined 9.6% over the past three months. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Particularly, we will be paying attention to UMS Holdings' ROE today.
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. Put another way, it reveals the company's success at turning shareholder investments into profits.
View our latest analysis for UMS Holdings
How Do You Calculate Return On Equity?
ROE 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:
12% = S$54m ÷ S$446m (Based on the trailing twelve months to March 2024).
The 'return' is the yearly profit. That means that for every SGD1 worth of shareholders' equity, the company generated SGD0.12 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. 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 12% ROE
To start with, UMS Holdings' ROE looks acceptable. On comparing with the average industry ROE of 8.3% the company's ROE looks pretty remarkable. Probably as a result of this, UMS Holdings was able to see a decent growth of 18% over the last five years.
We then performed a comparison between UMS Holdings' net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 17% in the same 5-year period.
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. This then helps them determine if the stock is placed for a bright or bleak future. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if UMS Holdings is trading on a high P/E or a low P/E, relative to its industry.