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Telekom Malaysia Berhad's (KLSE:TM) stock up by 2.2% over the past month. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Particularly, we will be paying attention to Telekom Malaysia Berhad's ROE today.
Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.
View our latest analysis for Telekom Malaysia 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 Telekom Malaysia Berhad is:
14% = RM1.1b ÷ RM8.1b (Based on the trailing twelve months to March 2023).
The 'return' is the yearly profit. That means that for every MYR1 worth of shareholders' equity, the company generated MYR0.14 in profit.
What Has ROE Got To Do With Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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.
Telekom Malaysia Berhad's Earnings Growth And 14% ROE
To begin with, Telekom Malaysia Berhad seems to have a respectable ROE. Further, the company's ROE compares quite favorably to the industry average of 9.7%. This probably laid the ground for Telekom Malaysia Berhad's moderate 19% net income growth seen over the past five years.
As a next step, we compared Telekom Malaysia 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 15%.
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 TM worth today? The intrinsic value infographic in our free research report helps visualize whether TM is currently mispriced by the market.