With its stock down 7.9% over the past three months, it is easy to disregard PGF Capital Berhad (KLSE:PGF). However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. In this article, we decided to focus on PGF Capital 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. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.
See our latest analysis for PGF Capital Berhad
How To 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 PGF Capital Berhad is:
6.8% = RM14m ÷ RM208m (Based on the trailing twelve months to August 2023).
The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each MYR1 of shareholders' capital it has, the company made MYR0.07 in profit.
What Is The Relationship Between ROE And 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 all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.
A Side By Side comparison of PGF Capital Berhad's Earnings Growth And 6.8% ROE
When you first look at it, PGF Capital Berhad's ROE doesn't look that attractive. We then compared the company's ROE to the broader industry and were disappointed to see that the ROE is lower than the industry average of 8.9%. In spite of this, PGF Capital Berhad was able to grow its net income considerably, at a rate of 26% in the last five years. We reckon that there could be other factors at play here. For instance, the company has a low payout ratio or is being managed efficiently.
We then performed a comparison between PGF Capital Berhad's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 33% 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). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is PGF Capital Berhad fairly valued compared to other companies? These 3 valuation measures might help you decide.