Most readers would already be aware that Dayang Enterprise Holdings Bhd’s (KLSE:DAYANG) stock increased significantly by 27% over the past month. 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 Dayang Enterprise Holdings Bhd’s ROE.
ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company’s shareholders.
How Do You 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 Dayang Enterprise Holdings Bhd is:
6.1% = RM112m ÷ RM1.8b (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 MYR0.06 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.
A Side By Side comparison of Dayang Enterprise Holdings Bhd’s Earnings Growth And 6.1% ROE
At first glance, Dayang Enterprise Holdings Bhd’s ROE doesn’t look very promising. However, its ROE is similar to the industry average of 7.0%, so we won’t completely dismiss the company. Particularly, the exceptional 21% net income growth seen by Dayang Enterprise Holdings Bhd over the past five years is pretty remarkable. Considering the moderately low ROE, it is quite possible that there might be some other aspects that are positively influencing the company’s earnings 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 Dayang Enterprise Holdings Bhd’s growth is quite high when compared to the industry average growth of 17% in the same period, which is great to see.
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