The Tanco Holdings Berhad (KLSE:TANCO) share price has increased by a significant 42% in the past three months. Since a company's long-term fundamentals typically drive market outcomes, we wonder what role, if any, a company's financials play in price movements. I am thinking. In particular, I would like to pay attention to Tanco Holdings Berhad's ROE today.
Return on equity or ROE is a key measure used to evaluate how efficiently a company's management is utilizing the company's capital. In other words, it is a profitability ratio that measures the rate of return on the capital provided by a company's shareholders.
Check out our latest analysis for Tanco Holdings Berhad.
How do I calculate return on equity?
Return on equity can be calculated using the following formula:
Return on equity = Net income (from continuing operations) ÷ Shareholders' equity
So, based on the above formula, Tanco Holdings Berhad's ROE is:
4.6% = RM12 million ÷ RM273 million (Based on the trailing twelve months to December 2023).
“Return” is the annual profit. Another way to think of it is that for every RM1 worth of shares, the company allowed him to earn a profit of RM0.05.
Why is ROE important for profit growth?
So far, we have learned that ROE is a measure of a company's profitability. Depending on how much of these profits a company reinvests or “retains”, and how effectively it does so, we are then able to assess a company's earnings growth potential. Generally, other things being equal, companies with high return on equity and profit retention will have higher growth rates than companies without these attributes.
A side-by-side comparison of Tanco Holdings Berhad's earnings growth and ROE 4.6%
It's hard to argue that Tanco Holdings Berhad's ROE is very good on its own. When compared to the industry, the company's ROE is not much different from the industry average of 4.2%. We're definitely impressed, especially when looking at his exceptional 40% net profit growth over five years for Tanco Holdings Berhad. There may also be other reasons behind this growth, given the low ROE. For example, the company's management may have made some good strategic decisions, or the company may have a low dividend payout ratio.
We then compare it to the industry's net income growth rate, which is great to see that Tanco Holdings Berhad's growth rate is quite high when compared to the industry average growth rate of 5.7% over the same period.
Earnings growth is a big factor in stock valuation. The next thing investors need to determine is whether the expected earnings growth is already built into the stock price, or the lack thereof. Doing so will help you determine whether a stock's future is promising or ominous. If you're curious about Tanco Holdings Berhad's valuation, check out this metric of its price-to-earnings ratio compared to its industry.
Is Tanco Holdings Berhad using its profits efficiently?
Tanco Holdings Berhad does not pay dividends to its shareholders. This means that the company reinvests all of its profits back into the business. This is likely what is driving the high earnings growth rate discussed above.
summary
Overall, we feel that Tanco Holdings Berhad certainly has some positive factors to consider. Despite the low ROE, the company was able to achieve strong earnings growth due to its high reinvestment rate. We don't want to completely fire the company, but we do try to see how risky the business is in order to make more informed decisions about the company. To learn about the 2 risks we have identified for Tanco Holdings Berhad, please visit our risks dashboard for free.
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This article by Simply Wall St is general in nature. We provide commentary using only unbiased methodologies, based on historical data and analyst forecasts, and articles are not intended to be financial advice. This is not a recommendation to buy or sell any stock, and does not take into account your objectives or financial situation. We aim to provide long-term, focused analysis based on fundamental data. Note that our analysis may not factor in the latest announcements or qualitative material from price-sensitive companies. Simply Wall St has no position in any stocks mentioned.
