Focus Point Holdings Berhad (KLSE:FOCUSP) has had a great run on the share market with its stock up by a significant 40% over the last 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 Focus Point Holdings 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 simpler terms, it measures the profitability of a company in relation to shareholder’s equity.
How Do You Calculate Return On Equity?
Return on equity can be calculated by using the formula:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity
So, based on the above formula, the ROE for Focus Point Holdings Berhad is:
36% = RM35m ÷ RM96m (Based on the trailing twelve months to September 2022).
The ‘return’ is the amount earned after tax over the last twelve months. Another way to think of that is that for every MYR1 worth of equity, the company was able to earn MYR0.36 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. 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 all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don’t have the same features.
Focus Point Holdings Berhad’s Earnings Growth And 36% ROE
Firstly, we acknowledge that Focus Point Holdings Berhad has a significantly high ROE. Second, a comparison with the average ROE reported by the industry of 18% also doesn’t go unnoticed by us. So, the substantial 46% net income growth seen by Focus Point Holdings Berhad over the past five years isn’t overly surprising.
As a next step, we compared Focus Point Holdings 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 31%.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company’s expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you’re wondering about Focus Point Holdings Berhad’s’s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Focus Point Holdings Berhad Using Its Retained Earnings Effectively?
Focus Point Holdings Berhad has a three-year median payout ratio of 42% (where it is retaining 58% of its income) which is not too low or not too high. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like Focus Point Holdings Berhad is reinvesting its earnings efficiently.
Besides, Focus Point Holdings Berhad has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Based on the latest analysts’ estimates, we found that the company’s future payout ratio over the next three years is expected to hold steady at 33%. Still, forecasts suggest that Focus Point Holdings Berhad’s future ROE will drop to 26% even though the the company’s payout ratio is not expected to change by much.
In total, we are pretty happy with Focus Point Holdings Berhad’s performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. To know more about the company’s future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.
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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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