With its stock down 1.8% over the past month, it is easy to disregard Luxchem Corporation Berhad (KLSE:LUXCHEM). But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. In this article, we decided to focus on Luxchem Corporation Berhad's ROE.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Put another way, it reveals the company's success at turning shareholder investments into profits.

View our latest analysis for Luxchem Corporation Berhad

How Is ROE Calculated?

Return on equity 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 Luxchem Corporation Berhad is:

12% = RM69m ÷ RM587m (Based on the trailing twelve months to September 2022).

The 'return' is the amount earned after tax over the last twelve months. So, this means that for every MYR1 of its shareholder's investments, the company generates a profit of MYR0.12.

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.

Luxchem Corporation Berhad's Earnings Growth And 12% ROE

At first glance, Luxchem Corporation Berhad seems to have a decent ROE. Further, the company's ROE compares quite favorably to the industry average of 9.0%. This certainly adds some context to Luxchem Corporation Berhad's decent 14% net income growth seen over the past five years.

We then performed a comparison between Luxchem Corporation Berhad's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 14% in the same period.

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. Is Luxchem Corporation Berhad fairly valued compared to other companies? These 3 valuation measures might help you decide.