Most readers would already be aware that Greatech Technology Berhad’s (KLSE:GREATEC) stock increased significantly by 11% 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. Particularly, we will be paying attention to Greatech Technology Berhad’s ROE today.
Return on equity or ROE is a key measure used to assess how efficiently a company’s management is utilizing the company’s capital. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
See our latest analysis for Greatech Technology Berhad
How Is ROE Calculated?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity
So, based on the above formula, the ROE for Greatech Technology Berhad is:
22% = RM144m ÷ RM659m (Based on the trailing twelve months to June 2023).
The ‘return’ is the yearly profit. That means that for every MYR1 worth of shareholders’ equity, the company generated MYR0.22 in profit.
What Is The Relationship Between ROE And Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. We now need to evaluate how much profit the company reinvests or “retains” for future growth which then gives us an idea about the growth potential of the company. 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.
Greatech Technology Berhad’s Earnings Growth And 22% ROE
To start with, Greatech Technology Berhad’s ROE looks acceptable. On comparing with the average industry ROE of 11% the company’s ROE looks pretty remarkable. Probably as a result of this, Greatech Technology Berhad was able to see an impressive net income growth of 24% over the last five years. However, there could also be other causes behind this growth. Such as – high earnings retention or an efficient management in place.
We then compared Greatech Technology 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 17% in the same 5-year 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. If you’re wondering about Greatech Technology Berhad’s’s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Greatech Technology Berhad Efficiently Re-investing Its Profits?
Greatech Technology Berhad doesn’t pay any dividend to its shareholders, meaning that the company has been reinvesting all of its profits into the business. This is likely what’s driving the high earnings growth number discussed above.
Summary
In total, we are pretty happy with Greatech Technology Berhad’s performance. In particular, it’s great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
