Infoline Tec Group Berhad (KLSE:INFOTEC) has had a rough three months with its share price down 17%. But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. Particularly, we will be paying attention to Infoline Tec Group 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.
See our latest analysis for Infoline Tec Group Berhad
How Is ROE Calculated?
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 Infoline Tec Group Berhad is:
24% = RM12m ÷ RM50m (Based on the trailing twelve months to December 2022).
The ‘return’ is the profit over the last twelve months. So, this means that for every MYR1 of its shareholder’s investments, the company generates a profit of MYR0.24.
Why Is ROE Important For 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 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.
Infoline Tec Group Berhad’s Earnings Growth And 24% ROE
To begin with, Infoline Tec Group Berhad has a pretty high ROE which is interesting. Secondly, even when compared to the industry average of 14% the company’s ROE is quite impressive. So, the substantial 23% net income growth seen by Infoline Tec Group Berhad over the past five years isn’t overly surprising.
When you consider the fact that the industry earnings have shrunk at a rate of 4.0% in the same period, the company’s net income growth is pretty remarkable.
Earnings growth is a huge factor in stock valuation. 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 Infoline Tec Group Berhad’s’s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Infoline Tec Group Berhad Using Its Retained Earnings Effectively?
Infoline Tec Group Berhad’s three-year median payout ratio to shareholders is 22%, which is quite low. This implies that the company is retaining 78% of its profits. So it seems like the management is reinvesting profits heavily to grow its business and this reflects in its earnings growth number.
Summary
On the whole, we feel that Infoline Tec Group Berhad’s performance has been quite good. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Remember, the price of a stock is also dependent on the perceived risk. Therefore investors must keep themselves informed about the risks involved before investing in any company. Our risks dashboard would have the 3 risks we have identified for Infoline Tec Group Berhad.
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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.
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