Shares of JF Technology Berhad (KLSE:JFTECH) have gained a significant 14% over the past three months. Given that stock prices are generally aligned with a company’s long-term financial performance, we decided to examine its financials more closely to see if they had a hand in the recent price movement. Specifically, we decided to examine the ROE of JF Technology Berhad in this article.
Return on equity, or ROE, is a test of how effectively a company is increasing its value and managing investors’ money. In simpler terms, it measures a company’s profitability in relation to shareholder’s equity.
Check out our latest analysis on JF Technology Berhad
How is ROE calculated?
ROE can be calculated using the formula:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE for JF Technology Berhad is:
8.8% = RM12 million ÷ RM133 million (Based on last twelve months to June 2023).
“Return” is the amount earned after tax in the last twelve months. One way to conceptualize this is that for every MYR1 of shareholders’ equity it holds, the company makes MYR0.09 in profit.
What is the relationship between ROE and revenue growth?
So far we have learned that ROE is a measure of a company’s profitability. Depending on how much of these earnings the company reinvests or “retains” and how efficiently it does so, we are able to assess the company’s earnings growth potential. Generally speaking, other things being equal, firms with a high return on capital and earnings retention have a higher growth rate than firms that do not share these characteristics.
JF Technology Berhad’s revenue growth and 8.8% ROE
At first glance, JF Technology Berhad’s ROE does not look very promising. We then compared the company’s ROE to the wider industry and were disappointed to see that the ROE was lower than the industry average of 11%. However, JF Technology Berhad has managed to increase its net income significantly, at a rate of 40% over the past five years. So there may be other aspects that positively affect the company’s revenue growth. For example, the company has a low payout ratio or is managed efficiently.
We then compared JF Technology Berhad’s net income growth with the industry and we are pleased to see that the company’s growth figure is higher compared to the industry which has a growth rate of 19% over the same 5-year period.
Earnings growth is a huge factor in stock valuation. What investors need to determine next is whether the expected earnings growth, or lack thereof, is already built into the stock price. This then helps them determine whether the stock is set for a bright or dark future. 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 prospects. So you might want to check whether JF Technology Berhad is trading at a high P/E or a low P/E relative to its industry.
Is JF Technology Berhad effectively using its retained earnings?
JF Technology Berhad’s significant three-year average payout ratio of 57% (where it retains only 43% of its earnings) suggests that the company has been able to achieve high earnings growth despite returning most of its earnings to shareholders.
Furthermore, JF Technology Berhad is determined to continue sharing its profits with shareholders, which we infer from its long history of nine years of dividend payouts.
Overall, we think JF Technology Berhad has some positive attributes. That is, quite impressive revenue growth. However, low earnings retention means the company’s revenue growth could have been higher if it reinvested more of its earnings. So far, we have only done a brief survey of the company’s growth data. You can do your own research on JF Technology Berhad and see how it has performed in the past by checking out this FREE detailed graphics of past earnings, revenue and cash flows.
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This article from Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts, using only an unbiased methodology, and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. We aim to provide you with long-term focused analysis driven by fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or quality materials. Simply Wall St has no position in the stocks mentioned.