Can Mixed Fundamentals Have A Negative Impact on CEKD Berhad (KLSE:CEKD) Current Share Price Momentum?

CEKD Berhad (KLSE:CEKD) has had a great run on the share market with its stock up by a significant 31% over the last week. However, we decided to pay attention to the company's fundamentals which don't appear to give a clear sign about the company's financial health. Specifically, we decided to study CEKD Berhad's ROE in this article.

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.

See our latest analysis for CEKD 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 CEKD Berhad is:

10% = RM7.5m ÷ RM73m (Based on the trailing twelve months to November 2024).

The 'return' is the yearly profit. That means that for every MYR1 worth of shareholders' equity, the company generated MYR0.10 in profit.

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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. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.

CEKD Berhad's Earnings Growth And 10% ROE

When you first look at it, CEKD Berhad's ROE doesn't look that attractive. However, the fact that the company's ROE is higher than the average industry ROE of 6.6%, is definitely interesting. However, CEKD Berhad's five year net income growth was quite low averaging at only 3.7%. Bear in mind, the company does have a low ROE. It is just that the industry ROE is lower. Therefore, the low growth in earnings could also be the result of this.

We then compared CEKD Berhad's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 8.6% in the same 5-year period, which is a bit concerning.

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about CEKD Berhad's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is CEKD Berhad Efficiently Re-investing Its Profits?

The high three-year median payout ratio of 62% (that is, the company retains only 38% of its income) over the past three years for CEKD Berhad suggests that the company's earnings growth was lower as a result of paying out a majority of its earnings.

In addition, CEKD Berhad only recently started paying a dividend so the management must have decided the shareholders prefer dividends over earnings growth.

Summary

In total, we're a bit ambivalent about CEKD Berhad's performance. Primarily, we are disappointed to see a lack of growth in earnings even in spite of a moderate ROE. Bear in mind, the company reinvests a small portion of its profits, which explains the lack of growth. Wrapping up, we would proceed with caution with this company and one way of doing that would be to look at the risk profile of the business. To know the 3 risks we have identified for CEKD Berhad visit our risks dashboard for free.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.