With its stock down 3.3% over the past month, it is easy to disregard E.A. Technique (M) Berhad (KLSE:EATECH). 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. In this article, we decided to focus on E.A. Technique (M) Berhad's ROE.

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.

See our latest analysis for E.A. Technique (M) Berhad

How Is ROE Calculated?

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 E.A. Technique (M) Berhad is:

46% = RM110m ÷ RM240m (Based on the trailing twelve months to June 2024).

The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each MYR1 of shareholders' capital it has, the company made MYR0.46 in profit.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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.

E.A. Technique (M) Berhad's Earnings Growth And 46% ROE

Firstly, we acknowledge that E.A. Technique (M) Berhad has a significantly high ROE. Additionally, the company's ROE is higher compared to the industry average of 12% which is quite remarkable. Probably as a result of this, E.A. Technique (M) Berhad was able to see a decent net income growth of 18% over the last five years.

As a next step, we compared E.A. Technique (M) Berhad's net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 18% in the same period.

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. Is E.A. Technique (M) Berhad fairly valued compared to other companies? These 3 valuation measures might help you decide.