It is hard to get excited after looking at Cloudpoint Technology Berhad's (KLSE:CLOUDPT) recent performance, when its stock has declined 7.9% over the past three months. But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. In this article, we decided to focus on Cloudpoint Technology Berhad's ROE.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
Check out our latest analysis for Cloudpoint Technology Berhad
How Is ROE Calculated?
The formula for return on equity is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Cloudpoint Technology Berhad is:
23% = RM15m ÷ RM69m (Based on the trailing twelve months to June 2023).
The 'return' is the amount earned after tax over the last twelve months. That means that for every MYR1 worth of shareholders' equity, the company generated MYR0.23 in profit.
What Is The Relationship Between ROE And Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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.
Cloudpoint Technology Berhad's Earnings Growth And 23% ROE
At first glance, Cloudpoint Technology Berhad seems to have a decent ROE. And on comparing with the industry, we found that the the average industry ROE is similar at 20%. This probably goes some way in explaining Cloudpoint Technology Berhad's significant 23% net income growth over the past five years amongst other factors. We believe that there might also be other aspects that are positively influencing the company's earnings growth. For instance, the company has a low payout ratio or is being managed efficiently.
We then performed a comparison between Cloudpoint Technology Berhad's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 21% in the same 5-year period.