Most readers would already know that Magni-Tech Industries Berhad's (KLSE:MAGNI) stock increased by 6.8% over the past three months. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to investigate if the company's decent financials had a hand to play in the recent price move. In this article, we decided to focus on Magni-Tech Industries Berhad's ROE.
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. Put another way, it reveals the company's success at turning shareholder investments into profits.
View our latest analysis for Magni-Tech Industries 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 Magni-Tech Industries Berhad is:
12% = RM101m ÷ RM844m (Based on the trailing twelve months to October 2023).
The 'return' is the amount earned after tax over the last twelve months. So, this means that for every MYR1 of its shareholder's investments, the company generates a profit of MYR0.12.
What Has ROE Got To Do With Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.
Magni-Tech Industries Berhad's Earnings Growth And 12% ROE
To start with, Magni-Tech Industries Berhad's ROE looks acceptable. On comparing with the average industry ROE of 7.4% the company's ROE looks pretty remarkable. Needless to say, we are quite surprised to see that Magni-Tech Industries Berhad's net income shrunk at a rate of 2.2% over the past five years. Therefore, there might be some other aspects that could explain this. Such as, the company pays out a huge portion of its earnings as dividends, or is faced with competitive pressures.
However, when we compared Magni-Tech Industries Berhad's growth with the industry we found that while the company's earnings have been shrinking, the industry has seen an earnings growth of 7.2% in the same period. This is quite worrisome.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. Is Magni-Tech Industries Berhad fairly valued compared to other companies? These 3 valuation measures might help you decide.