With its stock down 6.3% over the past three months, it is easy to disregard ECA Integrated Solution Berhad (KLSE:ECA). 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. Particularly, we will be paying attention to ECA Integrated Solution Berhad's ROE today.
ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
View our latest analysis for ECA Integrated Solution Berhad
How Is ROE Calculated?
Return on equity 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 ECA Integrated Solution Berhad is:
23% = RM14m ÷ RM60m (Based on the trailing twelve months to July 2023).
The 'return' is the yearly profit. One way to conceptualize this is that for each MYR1 of shareholders' capital it has, the company made MYR0.23 in profit.
Why Is ROE Important For Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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 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.
ECA Integrated Solution Berhad's Earnings Growth And 23% ROE
To begin with, ECA Integrated Solution Berhad seems to have a respectable ROE. Especially when compared to the industry average of 8.5% the company's ROE looks pretty impressive. This probably laid the ground for ECA Integrated Solution Berhad's significant 38% net income growth seen over the past five years. We believe that there might also be other aspects that are positively influencing the company's earnings growth. Such as - high earnings retention or an efficient management in place.
As a next step, we compared ECA Integrated Solution Berhad's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 9.8%.