LFE Corporation Berhad (KLSE:LFECORP) has had a great run on the share market with its stock up by a significant 13% over the last month. However, we wonder if the company's inconsistent financials would have any adverse impact on the current share price momentum. Specifically, we decided to study LFE Corporation Berhad's ROE in this article.
Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Put another way, it reveals the company's success at turning shareholder investments into profits.
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 LFE Corporation Berhad is:
3.2% = RM1.2m ÷ RM37m (Based on the trailing twelve months to June 2020).
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 MYR0.03.
What Is The Relationship Between ROE And 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.
A Side By Side comparison of LFE Corporation Berhad's Earnings Growth And 3.2% ROE
It is quite clear that LFE Corporation Berhad's ROE is rather low. An industry comparison shows that the company's ROE is not much different from the industry average of 3.8% either. Given the circumstances, the significant decline in net income by 28% seen by LFE Corporation Berhad over the last five years is not surprising.
As a next step, we compared LFE Corporation Berhad's performance with the industry and found thatLFE Corporation Berhad's performance is depressing even when compared with the industry, which has shrunk its earnings at a rate of 4.7% in the same period, which is a slower than the company.
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. Is LFE Corporation Berhad fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is LFE Corporation Berhad Making Efficient Use Of Its Profits?
Overall, we have mixed feelings about LFE Corporation Berhad. While the company does have a high rate of profit retention, its low rate of return is probably hampering its earnings 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. You can see the 4 risks we have identified for LFE Corporation Berhad by visiting our risks dashboard for free on our platform here.
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This article by Simply Wall St is general in nature. 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.
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