Icon Offshore Berhad's (KLSE:ICON) stock is up by a considerable 60% over the past three months. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. In this article, we decided to focus on Icon Offshore 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.
Check out our latest analysis for Icon Offshore Berhad
How To Calculate Return On Equity?
The formula for return on equity is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Icon Offshore Berhad is:
40% = RM161m ÷ RM407m (Based on the trailing twelve months to June 2023).
The 'return' refers to a company's earnings over the last year. So, this means that for every MYR1 of its shareholder's investments, the company generates a profit of MYR0.40.
Why Is ROE Important For 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 everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.
A Side By Side comparison of Icon Offshore Berhad's Earnings Growth And 40% ROE
Firstly, we acknowledge that Icon Offshore Berhad has a significantly high ROE. Additionally, the company's ROE is higher compared to the industry average of 10.0% which is quite remarkable. As a result, Icon Offshore Berhad's exceptional 73% net income growth seen over the past five years, doesn't come as a surprise.
As a next step, we compared Icon Offshore Berhad's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 17%.
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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. What is ICON worth today? The intrinsic value infographic in our free research report helps visualize whether ICON is currently mispriced by the market.