Unique Fire Holdings Berhad's (KLSE:UNIQUE) stock is up by 4.8% over the past month. Given that the stock prices usually follow long-term business performance, we wonder if the company's mixed financials could have any adverse effect on its current price price movement In this article, we decided to focus on Unique Fire Holdings Berhad's ROE.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.
View our latest analysis for Unique Fire Holdings Berhad
How Do You Calculate Return On Equity?
The formula for return on equity is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Unique Fire Holdings Berhad is:
3.9% = RM3.1m ÷ RM79m (Based on the trailing twelve months to December 2022).
The 'return' is the yearly profit. 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?
So far, we've learned that ROE is a measure of a company's profitability. 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 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.
Unique Fire Holdings Berhad's Earnings Growth And 3.9% ROE
As you can see, Unique Fire Holdings Berhad's ROE looks pretty weak. Even compared to the average industry ROE of 9.6%, the company's ROE is quite dismal. For this reason, Unique Fire Holdings Berhad's five year net income decline of 27% is not surprising given its lower ROE. We reckon that there could also be other factors at play here. Such as - low earnings retention or poor allocation of capital.
That being said, we compared Unique Fire Holdings Berhad's performance with the industry and were concerned when we found that while the company has shrunk its earnings, the industry has grown its earnings at a rate of 6.1% in the same 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. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Unique Fire Holdings Berhad's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.