Most readers would already be aware that Eastern & Oriental Berhad’s (KLSE:E&O) stock increased significantly by 74% over the past three months. Given the company’s impressive performance, we decided to study its financial indicators more closely as a company’s financial health over the long-term usually dictates market outcomes. In this article, we decided to focus on Eastern & Oriental Berhad’s ROE.
Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. Put another way, it reveals the company’s success at turning shareholder investments into profits.
Check out our latest analysis for Eastern & Oriental Berhad
How Do You 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 Eastern & Oriental Berhad is:
5.6% = RM120m ÷ RM2.1b (Based on the trailing twelve months to December 2023).
The ‘return’ refers to a company’s earnings over the last year. So, this means that for every MYR1 of its shareholder’s investments, the company generates a profit of MYR0.06.
What Has ROE Got To Do With 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.
Eastern & Oriental Berhad’s Earnings Growth And 5.6% ROE
When you first look at it, Eastern & Oriental Berhad’s ROE doesn’t look that attractive. Although a closer study shows that the company’s ROE is higher than the industry average of 4.1% which we definitely can’t overlook. Especially when you consider Eastern & Oriental Berhad’s exceptional 28% net income growth over the past five years. Bear in mind, the company does have a moderately low ROE. It is just that the industry ROE is lower. So, there might well be other reasons for the earnings to grow. Such as- high earnings retention or the company belonging to a high growth industry.
Next, on comparing with the industry net income growth, we found that Eastern & Oriental Berhad’s growth is quite high when compared to the industry average growth of 6.0% in the same period, which is great to see.
Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company’s expected earnings growth (or decline). Doing so will help them establish if the stock’s future looks promising or ominous. 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 Eastern & Oriental Berhad is trading on a high P/E or a low P/E, relative to its industry.
Is Eastern & Oriental Berhad Efficiently Re-investing Its Profits?
Eastern & Oriental 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
On the whole, we feel that Eastern & Oriental Berhad’s performance has been quite good. In particular, it’s great to see that the company has seen significant growth in its earnings backed by a respectable ROE and a high reinvestment rate. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Let’s not forget, business risk is also one of the factors that affects the price of the stock. So this is also an important area that investors need to pay attention to before making a decision on any business. To know the 4 risks we have identified for Eastern & Oriental Berhad visit our risks dashboard for free.
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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.
