Leform Berhad (KLSE:LEFORM) has had a rough three months with its share price down 10.0%. It seems that the market might have completely ignored the positive aspects of the company’s fundamentals and decided to weigh-in more on the negative aspects. Fundamentals usually dictate market outcomes so it makes sense to study the company’s financials. In this article, we decided to focus on Leform Berhad’s ROE.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
View our latest analysis for Leform Berhad
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 Leform Berhad is:
2.1% = RM4.5m ÷ RM216m (Based on the trailing twelve months to September 2024).
The ‘return’ is the profit over the last twelve months. That means that for every MYR1 worth of shareholders’ equity, the company generated MYR0.02 in profit.
So far, we’ve learned that ROE is a measure of a company’s profitability. 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 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.
As you can see, Leform Berhad’s ROE looks pretty weak. Not just that, even compared to the industry average of 5.5%, the company’s ROE is entirely unremarkable. For this reason, Leform Berhad’s five year net income decline of 38% is not surprising given its lower ROE. However, there could also be other factors causing the earnings to decline. Such as – low earnings retention or poor allocation of capital.
However, when we compared Leform Berhad’s growth with the industry we found that while the company’s earnings have been shrinking, the industry has seen an earnings growth of 14% in the same period. This is quite worrisome.
Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company’s expected earnings growth (or decline). Doing so will help them establish if the stock’s future looks promising or ominous. If you’re wondering about Leform Berhad’s’s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
