Most readers would already know that the Scientex Berhad (KLSE:SCIENTX) share price has increased by 5.5% over the past three months. Given that the market rewards strong financials in the long run, I wonder if that will be the case this time as well. In particular, I would like to pay attention to Scientex Berhad's ROE today.
Return on equity or ROE is an important factor to be considered by a shareholder as it indicates how effectively their capital is being reinvested. Simply put, it is used to evaluate a company's profitability compared to its equity.
Check out our latest analysis for Scientex Berhad.
How do I calculate return on equity?
ROE can be calculated using the following formula:
Return on equity = Net income (from continuing operations) ÷ Shareholders' equity
So, based on the above formula, Scientex Berhad's ROE is:
13% = RM478m ÷ RM3.8b (Based on trailing 12 months to October 2023).
“Return” is the annual profit. Another way to think of it is that for every RM1 worth of shares, the company could earn him RM0.13 in profit.
What is the relationship between ROE and profit growth?
So far, we have learned that ROE measures how efficiently a company is generating its profits. Now we need to assess how much profit the company reinvests or “retains” for future growth, which gives us an idea about the company's growth potential. Generally speaking, other things being equal, companies with high return on equity and profit retention will have higher growth rates than companies without these attributes.
Scientex Berhad's revenue growth and ROE 13%
First, Scientex Berhad's ROE looks acceptable. When compared to the industry average of his ROE of 5.4%, his ROE for the company looks quite remarkable. This certainly gives some context to Scientex Berhad's healthy growth in net profit of 8.5% over the past five years.
We then compared Scientex Berhad's net income growth with the industry and found that the company's growth was on par with the industry's average growth rate of 8.9% over the same five-year period.
Earnings growth is an important metric to consider when evaluating a stock. The next thing investors need to determine is whether the expected earnings growth is already built into the stock price, or the lack thereof. That way, you'll know if the stock is headed for clear blue waters or if a swamp awaits. 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 outlook. So you might want to check whether Scientex Berhad is trading on a higher or lower P/E ratio, relative to its industry.
Does Scientex Berhad reinvest its profits efficiently?
Scientex Berhad's median three-year payout ratio is 33%, which means it retains the remaining 67% of its profits. This suggests that the dividend is well covered, and given the company's healthy growth, it appears that management is reinvesting earnings efficiently.
Moreover, Scientex Berhad has been paying dividends for at least 10 years. This means that the company is quite serious about sharing profits with shareholders. After reviewing the latest analyst consensus data, we found that the company is expected to continue paying out around 34% of its profit over the next three years. As a result, his ROE for Scientex Berhad is also not expected to change much, which is inferred from analysts' future ROE expectations of 14% for him.
summary
Overall, we feel that Scientex Berhad's performance is very good. In particular, we like that the company is reinvesting heavily in its business and has a high rate of return. Unsurprisingly, this led to impressive revenue growth. We also examined the latest analyst forecasts and found that the company's earnings growth rate is expected to be similar to its current growth rate. To know more about the latest analyst forecasts for the company, check out this visualization of analyst forecasts for the company.
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This article by Simply Wall St is general in nature. We provide commentary using only unbiased methodologies, based on historical data and analyst forecasts, and articles are not intended to be financial advice. This is not a recommendation to buy or sell any stock, and does not take into account your objectives or financial situation. We aim to provide long-term, focused analysis based on fundamental data. Note that our analysis may not factor in the latest announcements or qualitative material from price-sensitive companies. Simply Wall St has no position in any stocks mentioned.
