With its stock down 2.1% over the past month, it is easy to disregard Kuala Lumpur Kepong Berhad (KLSE:KLK). 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 Kuala Lumpur Kepong 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. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out our latest analysis for Kuala Lumpur Kepong Berhad

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 Kuala Lumpur Kepong Berhad is:

15% = RM2.2b ÷ RM15b (Based on the trailing twelve months to December 2022).

The 'return' is the income the business earned over the last year. That means that for every MYR1 worth of shareholders' equity, the company generated MYR0.15 in profit.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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. 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.

Kuala Lumpur Kepong Berhad's Earnings Growth And 15% ROE

To begin with, Kuala Lumpur Kepong Berhad seems to have a respectable ROE. Especially when compared to the industry average of 9.5% the company's ROE looks pretty impressive. This probably laid the ground for Kuala Lumpur Kepong Berhad's significant 33% net income growth seen over the past five years. We believe that there might also be other aspects that are positively influencing the company's earnings growth. For instance, the company has a low payout ratio or is being managed efficiently.

Next, on comparing with the industry net income growth, we found that Kuala Lumpur Kepong Berhad's growth is quite high when compared to the industry average growth of 18% in the same period, which is great to see.

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. Is KLK fairly valued? This infographic on the company's intrinsic value has everything you need to know.