With its stock down 17% over the past three months, it is easy to disregard C.I. Holdings Berhad (KLSE:CIHLDG). However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Particularly, we will be paying attention to C.I. Holdings Berhad's ROE today.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
See our latest analysis for C.I. Holdings Berhad
How Is ROE Calculated?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for C.I. Holdings Berhad is:
35% = RM171m ÷ RM495m (Based on the trailing twelve months to March 2023).
The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every MYR1 worth of equity, the company was able to earn MYR0.35 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. 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. 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.
C.I. Holdings Berhad's Earnings Growth And 35% ROE
First thing first, we like that C.I. Holdings Berhad has an impressive ROE. Second, a comparison with the average ROE reported by the industry of 9.1% also doesn't go unnoticed by us. So, the substantial 32% net income growth seen by C.I. Holdings Berhad over the past five years isn't overly surprising.
As a next step, we compared C.I. Holdings Berhad's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 20%.
Earnings growth is an important metric to consider when valuing a stock. 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 C.I. Holdings Berhad's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.