Westports Holdings Berhad's (KLSE:WPRTS) stock is up by 4.3% over the past month. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. In this article, we decided to focus on Westports Holdings Berhad's ROE.
Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.
How Do You Calculate Return On Equity?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Westports Holdings Berhad is:
25% = RM916m ÷ RM3.7b (Based on the trailing twelve months to March 2025).
The 'return' is the profit over the last twelve months. So, this means that for every MYR1 of its shareholder's investments, the company generates a profit of MYR0.25.
View our latest analysis for Westports Holdings Berhad
What Has ROE Got To Do With Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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 Westports Holdings Berhad's Earnings Growth And 25% ROE
Firstly, we acknowledge that Westports Holdings Berhad has a significantly high ROE. Second, a comparison with the average ROE reported by the industry of 6.2% also doesn't go unnoticed by us. This likely paved the way for the modest 6.7% net income growth seen by Westports Holdings Berhad over the past five years.
We then compared Westports Holdings 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 3.8% in the same 5-year period.
Earnings growth is an important metric to consider when valuing a stock. 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. 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 Westports Holdings Berhad is trading on a high P/E or a low P/E, relative to its industry.