It is hard to get excited after looking at OpenSys (M) Berhad’s (KLSE:OPENSYS) recent performance, when its stock has declined 9.9% over the past three months. However, the company’s fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. In this article, we decided to focus on OpenSys (M) 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. Put another way, it reveals the company’s success at turning shareholder investments into profits.
See our latest analysis for OpenSys (M) Berhad
How Do You Calculate Return On Equity?
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 OpenSys (M) Berhad is:
14% = RM13m ÷ RM90m (Based on the trailing twelve months to June 2024).
The ‘return’ is the income the business earned over the last year. Another way to think of that is that for every MYR1 worth of equity, the company was able to earn MYR0.14 in profit.
Why Is ROE Important For 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.
OpenSys (M) Berhad’s Earnings Growth And 14% ROE
At first glance, OpenSys (M) Berhad seems to have a decent ROE. On comparing with the average industry ROE of 10% the company’s ROE looks pretty remarkable. Despite this, OpenSys (M) Berhad’s five year net income growth was quite low averaging at only 3.5%. This is generally not the case as when a company has a high rate of return it should usually also have a high earnings growth rate. Such a scenario is likely to take place when a company pays out a huge portion of its earnings as dividends, or is faced with competitive pressures.
We then compared OpenSys (M) Berhad’s net income growth with the industry and found that the company’s growth figure is lower than the average industry growth rate of 12% in the same 5-year period, which is a bit concerning.
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. Is OpenSys (M) Berhad fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is OpenSys (M) Berhad Efficiently Re-investing Its Profits?
With a high three-year median payout ratio of 53% (or a retention ratio of 47%), most of OpenSys (M) Berhad’s profits are being paid to shareholders. This definitely contributes to the low earnings growth seen by the company.
In addition, OpenSys (M) Berhad has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth.
Summary
Overall, we feel that OpenSys (M) Berhad certainly does have some positive factors to consider. However, while the company does have a high ROE, its earnings growth number is quite disappointing. This can be blamed on the fact that it reinvests only a small portion of its profits and pays out the rest as dividends. While we won’t completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. To know the 3 risks we have identified for OpenSys (M) Berhad visit our risks dashboard for free.
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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.
