REDtone International Berhad's (KLSE:REDTONE) Financials Are Too Obscure To Link With Current Share Price Momentum: What's In Store For the Stock?

REDtone International Berhad (KLSE:REDTONE) has had a great run on the share market with its stock up by a significant 11% over the last month. 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. Particularly, we will be paying attention to REDtone International Berhad's ROE today.

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.

Check out our latest analysis for REDtone International Berhad

How To Calculate Return On Equity?

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 REDtone International Berhad is:

3.7% = RM5.7m ÷ RM154m (Based on the trailing twelve months to September 2020).

The 'return' is the yearly profit. One way to conceptualize this is that for each MYR1 of shareholders' capital it has, the company made MYR0.04 in profit.

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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 REDtone International Berhad's Earnings Growth And 3.7% ROE

As you can see, REDtone International Berhad's ROE looks pretty weak. Even when compared to the industry average of 6.9%, the ROE figure is pretty disappointing. In spite of this, REDtone International Berhad was able to grow its net income considerably, at a rate of 68% in the last five years. We reckon that there could be other factors at play here. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

Given that the industry shrunk its earnings at a rate of 2.7% in the same period, the net income growth of the company is quite impressive.

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. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about REDtone International Berhad's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is REDtone International Berhad Using Its Retained Earnings Effectively?

REDtone International Berhad's very high three-year median payout ratio of 211% suggests that the company is paying more to its shareholders than what it is earning. In spite of this, the company was able to grow its earnings significantly, as we saw above. Although, it could be worth keeping an eye on the high payout ratio as that's a huge risk. To know the 5 risks we have identified for REDtone International Berhad visit our risks dashboard for free.

Additionally, REDtone International Berhad has paid dividends over a period of eight years which means that the company is pretty serious about sharing its profits with shareholders.

Conclusion

On the whole, we feel that the performance shown by REDtone International Berhad can be open to many interpretations. Although the company has shown a pretty impressive growth in earnings, yet the low ROE and the low rate of reinvestment makes us skeptical about the continuity of that growth, especially when or if the business comes to face any threats. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. So it may be worth checking this free detailed graph of REDtone International Berhad's past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.

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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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