Supercomnet Technologies Berhad's (KLSE:SCOMNET) Stock Has Shown Weakness Lately But Financial Prospects Look Decent: Is The Market Wrong?

Supercomnet Technologies Berhad (KLSE:SCOMNET) has had a rough three months with its share price down 8.0%. But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. Particularly, we will be paying attention to Supercomnet Technologies 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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Check out our latest analysis for Supercomnet Technologies Berhad

How Is ROE Calculated?

Return on equity can be calculated by using the formula:

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 amount earned after tax over the last twelve months. That means that for every MYR1 worth of shareholders' equity, the company generated MYR0.09 in profit.

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 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 Supercomnet Technologies Berhad's Earnings Growth And 9.0% ROE

When you first look at it, Supercomnet Technologies Berhad's ROE doesn't look that attractive. However, given that the company's ROE is similar to the average industry ROE of 9.0%, we may spare it some thought. Looking at Supercomnet Technologies Berhad's exceptional 49% five-year net income growth in particular, we are definitely impressed. Given the slightly low ROE, it is likely that there could be some other aspects that are driving this growth. For instance, the company has a low payout ratio or is being managed efficiently.

Next, on comparing with the industry net income growth, we found that the growth figure reported by Supercomnet Technologies Berhad compares quite favourably to the industry average, which shows a decline of 8.0% in the same period.

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). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Supercomnet Technologies Berhad fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Supercomnet Technologies Berhad Making Efficient Use Of Its Profits?

The three-year median payout ratio for Supercomnet Technologies Berhad is 38%, which is moderately low. The company is retaining the remaining 62%. By the looks of it, the dividend is well covered and Supercomnet Technologies Berhad is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

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.

Conclusion

Overall, we feel that Supercomnet Technologies Berhad certainly does have some positive factors to consider. Even in spite of the low rate of return, the company has posted impressive earnings growth as a result of reinvesting heavily into its business. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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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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