Most readers would already be aware that Mieco Chipboard Berhad's (KLSE:MIECO) stock increased significantly by 38% over the past three months. 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 Mieco Chipboard Berhad's ROE in this article.
Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. Put another way, it reveals the company's success at turning shareholder investments into profits.
How Is ROE Calculated?
ROE 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 Mieco Chipboard Berhad is:
6.5% = RM28m ÷ RM423m (Based on the trailing twelve months to December 2021).
The 'return' is the profit over the last twelve months. One way to conceptualize this is that for each MYR1 of shareholders' capital it has, the company made MYR0.06 in profit.
What Has ROE Got To Do With Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.
Mieco Chipboard Berhad's Earnings Growth And 6.5% ROE
At first glance, Mieco Chipboard Berhad's ROE doesn't look very promising. However, its ROE is similar to the industry average of 5.6%, so we won't completely dismiss the company. Having said that, Mieco Chipboard Berhad's five year net income decline rate was 29%. Remember, the company's ROE is a bit low to begin with. Therefore, the decline in earnings could also be the result of this.
As a next step, we compared Mieco Chipboard Berhad's performance with the industry and found thatMieco Chipboard Berhad's performance is depressing even when compared with the industry, which has shrunk its earnings at a rate of 17% in the same period, which is a slower than the company.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Mieco Chipboard Berhad fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is Mieco Chipboard Berhad Making Efficient Use Of Its Profits?
Mieco Chipboard Berhad doesn't pay any dividend, meaning that the company is keeping all of its profits, which makes us wonder why it is retaining its earnings if it can't use them to grow its business. So there could be some other explanations in that regard. For instance, the company's business may be deteriorating.
In total, we're a bit ambivalent about Mieco Chipboard Berhad's performance. Even though it appears to be retaining most of its profits, given the low ROE, investors may not be benefitting from all that reinvestment after all. The low earnings growth suggests our theory correct. 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. Our risks dashboard would have the 3 risks we have identified for Mieco Chipboard Berhad.
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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.