With its stock down 24% in the past three months, it’s easy to overlook SWS Capital Berhad (KLSE: SWSCAP). We did, however, decide to study the company’s financial statements to determine if they had anything to do with falling prices. Long-term fundamentals usually determine market performance, so special attention should be paid to them. In this article, we have decided to focus on the ROE of SWS Capital Berhad.
Return on equity or ROE is a test of how effectively a company increases its value and manages investor money. In other words, it reveals the company’s success in turning shareholders’ investments into profits.
Check out our latest review for SWS Capital Berhad
How do you calculate return on equity?
ROE can be calculated using the formula:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE of SWS Capital Berhad is:
3.1% = RM3.4m RM111m (Based on the last twelve months up to March 2021).
“Return” refers to a company’s profits over the past year. One way to conceptualize this is that for every MYR1 of shareholder capital it has, the company made MYR0.03 of profit.
Why is ROE important for profit growth?
So far we’ve learned that ROE is a measure of a company’s profitability. We now need to assess the profits that the company is reinvesting or “withholding” for future growth, which then gives us an idea of the growth potential of the company. Assuming everything else remains the same, the higher the ROE and profit retention, the higher the growth rate of a business compared to businesses that don’t necessarily have these characteristics.
SWS Capital Berhad profit growth and 3.1% ROE
As you can see, the ROE of SWS Capital Berhad seems quite low. Even compared to the industry’s average ROE of 8.3%, the company’s ROE is pretty dismal. For this reason, SWS Capital Berhad’s 46% drop in net profit over five years is not surprising given its lower ROE. We believe that there could also be other aspects that negatively influence the company’s earnings outlook. For example, the company has misallocated capital or the company has a very high payout rate.
However, when we compared the growth of SWS Capital Berhad with the industry, we found that although the company’s profits declined, the industry saw profit growth of 1.1% over the course of the same period. It is quite worrying.
The basis for attaching value to a business is, to a large extent, related to the growth of its profits. It is important for an investor to know whether the market has factored in the expected growth (or decline) in company earnings. This will help them determine whether the future of the stock looks bright or threatening. A good indicator of expected earnings growth is the P / E ratio which determines the price the market is willing to pay for a stock based on its earnings outlook. So, you might want to check whether SWS Capital Berhad is trading high P / E or low P / E, relative to its industry.
Is SWS Capital Berhad Efficiently Reinvesting Its Profits?
Since SWS Capital Berhad does not pay any dividends, we infer that it keeps all of its profits, which is rather confusing considering the fact that there is no profit growth to show. for her. So there could be other factors at play here that could potentially hamper growth. For example, the company faced headwinds.
All in all, we are a little ambivalent about the performance of SWS Capital Berhad. Although the company has a high rate of profit retention, its low rate of return is likely to hamper its profit growth. In conclusion, we would proceed with caution with this company and one way to do it would be to look at the risk profile of the company. You can see the 5 risks we have identified for SWS Capital Berhad by visiting our risk dashboard for free on our platform here.
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