With its stock down 8.9% over the past week, it is easy to disregard Nextgreen Global Berhad (KLSE:NGGB). However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. Particularly, we will be paying attention to Nextgreen Global 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.
View our latest analysis for Nextgreen Global Berhad
How Do You Calculate Return On Equity?
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 Nextgreen Global Berhad is:
2.8% = RM9.5m ÷ RM339m (Based on the trailing twelve months to December 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 MYR0.03 in profit.
Why Is ROE Important For Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.
Nextgreen Global Berhad's Earnings Growth And 2.8% ROE
It is hard to argue that Nextgreen Global Berhad's ROE is much good in and of itself. Even when compared to the industry average of 8.5%, the ROE figure is pretty disappointing. In spite of this, Nextgreen Global Berhad was able to grow its net income considerably, at a rate of 52% in the last five years. We reckon that there could be other factors at play here. Such as - high earnings retention or an efficient management in place.
We then compared Nextgreen Global 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 14% in the same 5-year period.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. If you're wondering about Nextgreen Global Berhad's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.