LPI Capital Bhd's (KLSE:LPI) stock up by 4.5% over the past month. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. Particularly, we will be paying attention to LPI Capital Bhd'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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
See our latest analysis for LPI Capital Bhd
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 LPI Capital Bhd is:
15% = RM314m ÷ RM2.2b (Based on the trailing twelve months to September 2023).
The 'return' is the profit over the last twelve months. Another way to think of that is that for every MYR1 worth of equity, the company was able to earn MYR0.15 in profit.
What Is The Relationship Between ROE And Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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. 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.
LPI Capital Bhd's Earnings Growth And 15% ROE
At first glance, LPI Capital Bhd seems to have a decent ROE. On comparing with the average industry ROE of 7.9% the company's ROE looks pretty remarkable. However, we are curious as to how the high returns still resulted in flat growth for LPI Capital Bhd in the past five years. We reckon that there could be some other factors at play here that's limiting the company's growth. For example, it could be that the company has a high payout ratio or the business has allocated capital poorly, for instance.
As a next step, we compared LPI Capital Bhd's net income growth with the industry and discovered that the company's growth is slightly less than the industry average growth of 1.9% in the same period.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. What is LPI worth today? The intrinsic value infographic in our free research report helps visualize whether LPI is currently mispriced by the market.