JAG Berhad (KLSE:JAG) has had a tough three months, with its share price falling 9.2%. However, if you look closely, you may notice that the key financial indicators look pretty decent, which could mean the stock could potentially rise in the long term as markets typically reward more robust long-term fundamentals. Today we will pay special attention to JAG Berhad’s ROE.
Return on equity or ROE is an important metric used to assess how efficiently management is using the company’s capital. In simple terms, it measures the profitability of a company in relation to its equity capital.
Check out our latest analysis for JAG Berhad
How is ROE calculated?
ROE can be calculated using the formula:
Return on equity = net profit (from continuing operations) ÷ equity
So based on the above formula, the ROE for JAG Berhad is:
1.5% = RM3.1mil ÷ RM211mil (Based on trailing twelve months to September 2023).
The “return” is the income the company earned last year. So this means that for every MYR1 of its shareholders’ investment, the company makes a profit of MYR0.01.
Why is ROE important for earnings growth?
So far we have 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 can then assess a company’s earnings growth potential. In general, companies with a high return on equity and profit retention, other things being equal, have a higher growth rate than companies that do not have these characteristics.
JAG Berhad’s earnings growth and 1.5% ROE
It’s hard to argue that JAG Berhad’s ROE is very good on its own. Even compared to the industry average of 6.3%, the ROE figure is quite disappointing. Nevertheless, JAG Berhad has managed to increase its net profit significantly over the last five years, increasing by 39%. We believe there could be other aspects that positively impact the company’s earnings growth. For example, it is possible that management has made some good strategic decisions or that the company has a low payout ratio.
Next, when comparing with the industry’s net income growth, we found that JAG Berhad’s growth is quite high compared to the industry average of 12% in the same period, which is great to see.
The basis for a company’s valuation depends to a large extent on earnings growth. The investor should try to find out whether the expected growth or decline in earnings (as the case may be) is priced in. This way he can determine whether the stock’s future looks promising or threatening. If you’re wondering about JAG Berhad’s valuation, take a look at this measure of the company’s price-to-earnings ratio compared to the industry.
Is JAG Berhad using its retained earnings effectively?
JAG Berhad’s three-year average payout ratio to shareholders is 19%, which is quite low. This means that the company retains 81% of its profits. This suggests that management is reinvesting the majority of profits to grow the business, as evidenced by the company’s growth.
Additionally, JAG Berhad has paid dividends over a period of nine years, meaning the company is very serious about sharing its profits with shareholders.
Overall, we think JAG Berhad has some positive attributes. Despite the low return, the company has seen impressive profit growth thanks to significant reinvestments in its business. While we won’t completely reject the company, we would try to find out how risky the company is in order to make a more informed decision around the company. To learn more about the three risks we have identified for JAG Berhad, visit our free risk dashboard.
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This article from Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts using only an unbiased methodology and our articles are not intended as financial advice. It does not constitute a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term focused analysis based on fundamental data. Note that our analysis may not reflect the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.