It is hard to get excited after looking at Lee Swee Kiat Group Berhad's (KLSE:LEESK) recent performance, when its stock has declined 5.7% over the past three months. However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. Particularly, we will be paying attention to Lee Swee Kiat Group Berhad's ROE today.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Put another way, it reveals the company's success at turning shareholder investments into profits.
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 Lee Swee Kiat Group Berhad is:
15% = RM10m ÷ RM69m (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 MYR0.15 in profit.
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 Lee Swee Kiat Group Berhad's Earnings Growth And 15% ROE
To begin with, Lee Swee Kiat Group Berhad seems to have a respectable ROE. On comparing with the average industry ROE of 9.3% the company's ROE looks pretty remarkable. Despite this, Lee Swee Kiat Group Berhad's five year net income growth was quite flat over the past five years. We reckon that there could be some other factors at play here that's limiting the company's growth. For example, it could be that the company has a high payout ratio or the business has allocated capital poorly, for instance.
Next, on comparing with the industry net income growth, we found that Lee Swee Kiat Group Berhad's reported growth was lower than the industry growth of 12% over the last few years, which is not something we like to see.
Earnings growth is a huge factor in stock valuation. 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. Is Lee Swee Kiat Group Berhad fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is Lee Swee Kiat Group Berhad Efficiently Re-investing Its Profits?
The high three-year median payout ratio of 52% (meaning, the company retains only 48% of profits) for Lee Swee Kiat Group Berhad suggests that the company's earnings growth was miniscule as a result of paying out a majority of its earnings.
Moreover, Lee Swee Kiat Group Berhad has been paying dividends for six years, which is a considerable amount of time, suggesting that management must have perceived that the shareholders prefer dividends over earnings growth. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 49%. Still, forecasts suggest that Lee Swee Kiat Group Berhad's future ROE will rise to 18% even though the the company's payout ratio is not expected to change by much.
In total, it does look like Lee Swee Kiat Group Berhad has some positive aspects to its business. Yet, the low earnings growth is a bit concerning, especially given that the company has a high rate of return. Investors could have benefitted from the high ROE, had the company been reinvesting more of its earnings. As discussed earlier, the company is retaining a small portion of its profits. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.
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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.