With its stock down 3.9% over the past three months, it is easy to disregard Ranhill Utilities Berhad (KLSE:RANHILL). However, stock prices are usually driven by a company's financials over the long term, which in this case look pretty respectable. Specifically, we decided to study Ranhill Utilities Berhad's ROE in this article.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors' money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.
We've found 21 US stocks that are forecast to pay a dividend yield of over 6% next year. See the full list for free.
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 Ranhill Utilities Berhad is:
7.1% = RM75m ÷ RM1.1b (Based on the trailing twelve months to December 2024).
The 'return' is the yearly profit. One way to conceptualize this is that for each MYR1 of shareholders' capital it has, the company made MYR0.07 in profit.
See our latest analysis for Ranhill Utilities Berhad
So far, we've learned that ROE is a measure of a company's profitability. 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.
When you first look at it, Ranhill Utilities Berhad's ROE doesn't look that attractive. Next, when compared to the average industry ROE of 9.3%, the company's ROE leaves us feeling even less enthusiastic. However, the moderate 8.3% net income growth seen by Ranhill Utilities Berhad over the past five years is definitely a positive. So, the growth in the company's earnings could probably have been caused by other variables. For instance, the company has a low payout ratio or is being managed efficiently.
As a next step, we compared Ranhill Utilities 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 2.7%.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. Is Ranhill Utilities Berhad fairly valued compared to other companies? These 3 valuation measures might help you decide.