With its stock down 15% over the past three months, it is easy to disregard Pekat Group Berhad (KLSE:PEKAT). 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. Specifically, we decided to study Pekat Group Berhad's ROE in this article.
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 Pekat Group Berhad
How To Calculate Return On Equity?
The formula for return on equity is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Pekat Group Berhad is:
7.7% = RM10m ÷ RM129m (Based on the trailing twelve months to December 2022).
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 MYR0.08 in profit.
Why Is ROE Important For 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. 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.
A Side By Side comparison of Pekat Group Berhad's Earnings Growth And 7.7% ROE
At first glance, Pekat Group Berhad's ROE doesn't look very promising. However, the fact that the company's ROE is higher than the average industry ROE of 4.4%, is definitely interesting. However, Pekat Group Berhad's five year net income growth was quite low averaging at only 2.5%. Bear in mind, the company does have a low ROE. It is just that the industry ROE is lower. Therefore, the low growth in earnings could also be the result of this.
Next, on comparing with the industry net income growth, we found that the growth figure reported by Pekat Group Berhad compares quite favourably to the industry average, which shows a decline of 6.1% in the same period.
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. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Pekat Group Berhad is trading on a high P/E or a low P/E, relative to its industry.