Kawan Renergy Berhad (KLSE:KENERGY) has had a great run on the share market with its stock up by a significant 33% over the last month. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. Particularly, we will be paying attention to Kawan Renergy Berhad’s ROE today.
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. Put another way, it reveals the company’s success at turning shareholder investments into profits.
Check out our latest analysis for Kawan Renergy Berhad
Return on equity 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 Kawan Renergy Berhad is:
20% = RM19m ÷ RM95m (Based on the trailing twelve months to October 2024).
The ‘return’ is the yearly profit. So, this means that for every MYR1 of its shareholder’s investments, the company generates a profit of MYR0.20.
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.
To start with, Kawan Renergy Berhad’s ROE looks acceptable. On comparing with the average industry ROE of 7.1% the company’s ROE looks pretty remarkable. This probably laid the ground for Kawan Renergy Berhad’s significant 35% net income growth seen over the past five years. However, there could also be other causes behind this 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 Kawan Renergy Berhad’s growth is quite high when compared to the industry average growth of 8.0% in the same period, which is great to see.
Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you’re wondering about Kawan Renergy Berhad’s’s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
