With its stock down 4.8% over the past month, it is easy to disregard Batu Kawan Berhad (KLSE:BKAWAN). 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 Batu Kawan Berhad's 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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.
Check out our latest analysis for Batu Kawan Berhad
How Is ROE Calculated?
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 Batu Kawan Berhad is:
8.4% = RM1.5b ÷ RM17b (Based on the trailing twelve months to June 2023).
The 'return' is the income the business earned over the last year. Another way to think of that is that for every MYR1 worth of equity, the company was able to earn MYR0.08 in profit.
What Has ROE Got To Do With Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.
Batu Kawan Berhad's Earnings Growth And 8.4% ROE
At first glance, Batu Kawan Berhad's ROE doesn't look very promising. Although a closer study shows that the company's ROE is higher than the industry average of 6.4% which we definitely can't overlook. Especially when you consider Batu Kawan Berhad's exceptional 27% net income growth over the past five years. That being said, the company does have a slightly low ROE to begin with, just that it is higher than the industry average. Therefore, the growth in earnings could also be the result of other factors. Such as- high earnings retention or the company belonging to a high growth industry.
We then compared Batu Kawan 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 13% in the same 5-year period.
Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. 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 Batu Kawan Berhad's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.