Most readers would already be aware that Theta Edge Berhad’s (KLSE:THETA) stock increased significantly by 93% over the past three months. Given the company’s impressive performance, we decided to study its financial indicators more closely as a company’s financial health over the long-term usually dictates market outcomes. Specifically, we decided to study Theta Edge Berhad’s ROE in this article.
Return on equity or ROE is a key measure used to assess how efficiently a company’s management is utilizing the company’s capital. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
Check out our latest analysis for Theta Edge Berhad
How To Calculate Return On Equity?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity
So, based on the above formula, the ROE for Theta Edge Berhad is:
12% = RM9.6m ÷ RM81m (Based on the trailing twelve months to December 2023).
The ‘return’ is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each MYR1 of shareholders’ capital it has, the company made MYR0.12 in profit.
Why Is ROE Important For Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Based on how much of its profits the company chooses to reinvest or “retain”, we are then able to evaluate a company’s future ability to generate profits. 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.
Theta Edge Berhad’s Earnings Growth And 12% ROE
At first glance, Theta Edge Berhad seems to have a decent ROE. And on comparing with the industry, we found that the the average industry ROE is similar at 12%. This probably goes some way in explaining Theta Edge Berhad’s significant 32% net income growth over the past five years amongst other factors. We believe that there might also be other aspects that are positively influencing the company’s earnings growth. For example, it is possible that the company’s management has made some good strategic decisions, or that the company has a low payout ratio.
As a next step, we compared Theta Edge Berhad’s net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 26%.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. Is Theta Edge Berhad fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is Theta Edge Berhad Using Its Retained Earnings Effectively?
Theta Edge Berhad’s three-year median payout ratio is a pretty moderate 30%, meaning the company retains 70% of its income. So it seems that Theta Edge Berhad is reinvesting efficiently in a way that it sees impressive growth in its earnings (discussed above) and pays a dividend that’s well covered.
While Theta Edge Berhad has been growing its earnings, it only recently started to pay dividends which likely means that the company decided to impress new and existing shareholders with a dividend.
Summary
Overall, we are quite pleased with Theta Edge Berhad’s performance. 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. Not to forget, share price outcomes are also dependent on the potential risks a company may face. So it is important for investors to be aware of the risks involved in the business. To know the 2 risks we have identified for Theta Edge 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.