NCT Alliance Berhad (KLSE:NCT) has had a great run on the share market with its stock up by a significant 12% over the last three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. In this article, we decided to focus on NCT Alliance Berhad's ROE.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
View our latest analysis for NCT Alliance Berhad
How To Calculate Return On Equity?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for NCT Alliance Berhad is:
8.7% = RM43m ÷ RM495m (Based on the trailing twelve months to December 2022).
The 'return' is the yearly profit. One way to conceptualize this is that for each MYR1 of shareholders' capital it has, the company made MYR0.09 in profit.
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. 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.
A Side By Side comparison of NCT Alliance Berhad's Earnings Growth And 8.7% ROE
On the face of it, NCT Alliance Berhad's ROE is not much to talk about. Although a closer study shows that the company's ROE is higher than the industry average of 4.7% which we definitely can't overlook. Especially when you consider NCT Alliance Berhad's exceptional 53% net income growth over the past five years. Bear in mind, the company does have a moderately low ROE. It is just that the industry ROE is lower. Hence, there might be some other aspects that are causing earnings to grow. E.g the company has a low payout ratio or could belong to a high growth industry.
Given that the industry shrunk its earnings at a rate of 5.2% in the same period, the net income growth of the company is quite impressive.
Earnings growth is a huge factor in stock valuation. 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. If you're wondering about NCT Alliance Berhad's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.