With its stock down 4.2% over the past week, it is easy to disregard Only World Group Holdings Berhad (KLSE:OWG). It is possible that the markets have ignored the company's differing financials and decided to lean-in to the negative sentiment. Stock prices are usually driven by a company’s financial performance over the long term, and therefore we decided to pay more attention to the company's financial performance. Particularly, we will be paying attention to Only World Group Holdings 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. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
See our latest analysis for Only World Group Holdings 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 Only World Group Holdings Berhad is:
5.5% = RM12m ÷ RM215m (Based on the trailing twelve months to June 2023).
The 'return' is the profit over the last twelve months. One way to conceptualize this is that for each MYR1 of shareholders' capital it has, the company made MYR0.05 in profit.
What Is The Relationship Between ROE And Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.
Only World Group Holdings Berhad's Earnings Growth And 5.5% ROE
It is hard to argue that Only World Group Holdings Berhad's ROE is much good in and of itself. Further, we noted that the company's ROE is similar to the industry average of 4.8%. Therefore, it might not be wrong to say that the five year net income decline of 14% seen by Only World Group Holdings Berhad was possibly a result of the disappointing ROE.
Next, when we compared with the industry, which has shrunk its earnings at a rate of 5.3% in the same 5-year period, we still found Only World Group Holdings Berhad's performance to be quite bleak, because the company has been shrinking its earnings faster than the industry.
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. Doing so will help them establish if the stock's future looks promising or ominous. Has the market priced in the future outlook for OWG? You can find out in our latest intrinsic value infographic research report