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). To keep the lesson grounded in practicality, we’ll use ROE to better understand Bintai Kinden Corporation Berhad (KLSE:BINTAI).
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.
View our latest analysis for Bintai Kinden Corporation Berhad
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity
So, based on the above formula, the ROE for Bintai Kinden Corporation Berhad is:
15% = RM12m ÷ RM79m (Based on the trailing twelve months to September 2024).
The ‘return’ is the amount earned after tax over the last twelve months. That means that for every MYR1 worth of shareholders’ equity, the company generated MYR0.15 in profit.
Does Bintai Kinden Corporation Berhad Have A Good ROE?
By comparing a company’s ROE with its industry average, we can get a quick measure of how good it is. However, this method is only useful as a rough check, because companies do differ quite a bit within the same industry classification. As is clear from the image below, Bintai Kinden Corporation Berhad has a better ROE than the average (7.6%) in the Construction industry.
That’s clearly a positive. However, bear in mind that a high ROE doesn’t necessarily indicate efficient profit generation. Especially when a firm uses high levels of debt to finance its debt which may boost its ROE but the high leverage puts the company at risk. You can see the 4 risks we have identified for Bintai Kinden Corporation Berhad by visiting our risks dashboard for free on our platform here.
How Does Debt Impact ROE?
Companies usually need to invest money to grow their profits. That cash can come from retained earnings, issuing new shares (equity), 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 used for growth will improve returns, but won’t affect the total equity. In this manner the use of debt will boost ROE, even though the core economics of the business stay the same.
Bintai Kinden Corporation Berhad’s Debt And Its 15% ROE
Bintai Kinden Corporation Berhad clearly uses a high amount of debt to boost returns, as it has a debt to equity ratio of 1.67. While its ROE is pretty respectable, the amount of debt the company is carrying currently is not ideal. Investors should think carefully about how a company might perform if it was unable to borrow so easily, because credit markets do change over time.