It is easy to overlook Amlex Holdings Berhad's (KLSE:AMLEX) given its unimpressive and roughly flat price performance over the past three months. Regardless, it's worth giving the company a closer given that its key financial performance indicators look pretty strong and that's usually rewarded by the markets in the long-run. Particularly, we will be paying attention to Amlex Holdings Berhad's ROE today.
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. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.
See our latest analysis for Amlex Holdings Berhad
How Is ROE Calculated?
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 Amlex Holdings Berhad is:
19% = RM8.7m ÷ RM46m (Based on the trailing twelve months to September 2022).
The 'return' is the income the business earned over the last year. That means that for every MYR1 worth of shareholders' equity, the company generated MYR0.19 in profit.
Why Is ROE Important For 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. 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 Amlex Holdings Berhad's Earnings Growth And 19% ROE
At first glance, Amlex Holdings Berhad seems to have a decent ROE. Further, the company's ROE compares quite favorably to the industry average of 14%. Probably as a result of this, Amlex Holdings Berhad was able to see an impressive net income growth of 69% over the last five years. We reckon that there could also be other factors at play here. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.
Next, on comparing with the industry net income growth, we found that Amlex Holdings Berhad's growth is quite high when compared to the industry average growth of 14% in the same period, which is great to see.
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. 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 Amlex Holdings Berhad is trading on a high P/E or a low P/E, relative to its industry.