Many investors are still learning about the various metrics that can be useful when analysing a stock. This article is for those who would like to learn about Return On Equity (ROE). By way of learning-by-doing, we’ll look at ROE to gain a better understanding of MSB Global Group Berhad (KLSE:MSB).
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Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company’s shareholders.
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity
So, based on the above formula, the ROE for MSB Global Group Berhad is:
21% = RM9.1m ÷ RM44m (Based on the trailing twelve months to December 2024).
The ‘return’ is the profit over the last twelve months. So, this means that for every MYR1 of its shareholder’s investments, the company generates a profit of MYR0.21.
Check out our latest analysis for MSB Global Group Berhad
One simple way to determine if a company has a good return on equity is to compare it to the average for its industry. Importantly, this is far from a perfect measure, because companies differ significantly within the same industry classification. Pleasingly, MSB Global Group Berhad has a superior ROE than the average (7.7%) in the Retail Distributors industry.
That’s clearly a positive. With that said, a high ROE doesn’t always indicate high profitability. Aside from changes in net income, a high ROE can also be the outcome of high debt relative to equity, which indicates risk.
Companies usually need to invest money to grow their profits. That cash can come from issuing shares, retained earnings, or debt. In the case of the first and second options, the ROE will reflect this use of cash, for growth. In the latter case, the debt required for growth will boost returns, but will not impact the shareholders’ equity. That will make the ROE look better than if no debt was used.
While MSB Global Group Berhad does have some debt, with a debt to equity ratio of just 0.26, we wouldn’t say debt is excessive. The fact that it achieved a fairly good ROE with only modest debt suggests the business might be worth putting on your watchlist. Judicious use of debt to improve returns can certainly be a good thing, although it does elevate risk slightly and reduce future optionality.
