Could The Market Be Wrong About Supercomnet Technologies Berhad (KLSE:SCOMNET) Given Its Attractive Financial Prospects?

It is hard to get excited after looking at Supercomnet Technologies Berhad's (KLSE:SCOMNET) recent performance, when its stock has declined 7.0% over the past month. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Particularly, we will be paying attention to Supercomnet Technologies Berhad's ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

Check out our latest analysis for Supercomnet Technologies 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 Supercomnet Technologies Berhad is:

9.0% = RM20m ÷ RM226m (Based on the trailing twelve months to September 2020).

The 'return' is the yearly profit. So, this means that for every MYR1 of its shareholder's investments, the company generates a profit of MYR0.09.

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. 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.

Supercomnet Technologies Berhad's Earnings Growth And 9.0% ROE

On the face of it, Supercomnet Technologies 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 5.4% which we definitely can't overlook. Even more so after seeing Supercomnet Technologies Berhad's exceptional 49% 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. Therefore, the growth in earnings could also be the result of other factors. Such as- high earnings retention or the company belonging to a high growth industry.

When you consider the fact that the industry earnings have shrunk at a rate of 9.3% in the same period, the company's net income growth is pretty remarkable.

Earnings growth is an important metric to consider when valuing a stock. 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. If you're wondering about Supercomnet Technologies Berhad's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Supercomnet Technologies Berhad Using Its Retained Earnings Effectively?

Supercomnet Technologies Berhad's three-year median payout ratio is a pretty moderate 38%, meaning the company retains 62% of its income. So it seems that Supercomnet Technologies Berhad is reinvesting efficiently in a way that it sees impressive growth in its earnings (discussed above) and pays a dividend that's well covered.

Moreover, Supercomnet Technologies Berhad is determined to keep sharing its profits with shareholders which we infer from its long history of nine years of paying a dividend.

Summary

In total, we are pretty happy with Supercomnet Technologies Berhad's performance. Particularly, we like that the company is reinvesting heavily into its business at a moderate rate of return. Unsurprisingly, this has led to an impressive earnings growth. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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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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