Rexit Berhad's (KLSE:REXIT) Stock Has Seen Strong Momentum: Does That Call For Deeper Study Of Its Financial Prospects?

Rexit Berhad (KLSE:REXIT) has had a great run on the share market with its stock up by a significant 20% over the last three months. As most would know, fundamentals are what usually guide market price movements over the long-term, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. In this article, we decided to focus on Rexit Berhad's ROE.

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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for Rexit Berhad

How Is ROE Calculated?

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 Rexit Berhad is:

22% = RM11m ÷ RM52m (Based on the trailing twelve months to September 2023).

The 'return' is the yearly profit. That means that for every MYR1 worth of shareholders' equity, the company generated MYR0.22 in profit.

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. 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 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.

Rexit Berhad's Earnings Growth And 22% ROE

To begin with, Rexit Berhad seems to have a respectable ROE. On comparing with the average industry ROE of 7.0% the company's ROE looks pretty remarkable. This probably laid the ground for Rexit Berhad's moderate 5.4% net income growth seen over the past five years.

Next, on comparing with the industry net income growth, we found that Rexit Berhad's reported growth was lower than the industry growth of 12% over the last few years, which is not something we like to see.

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). This then helps them determine if the stock is placed for a bright or bleak future. Has the market priced in the future outlook for REXIT? You can find out in our latest intrinsic value infographic research report.

Is Rexit Berhad Efficiently Re-investing Its Profits?

The high three-year median payout ratio of 71% (or a retention ratio of 29%) for Rexit Berhad suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Besides, Rexit Berhad has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 73% of its profits over the next three years. Accordingly, forecasts suggest that Rexit Berhad's future ROE will be 22% which is again, similar to the current ROE.

Summary

On the whole, we do feel that Rexit Berhad has some positive attributes. Its earnings have grown respectably as we saw earlier, which was likely due to the company reinvesting its earnings at a pretty high rate of return. However, given the high ROE, we do think that the company is reinvesting a small portion of its profits. This could likely be preventing the company from growing to its full extent. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. 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. 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.