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 PTT Synergy Group Berhad (KLSE:PTT).
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Put another way, it reveals the company’s success at turning shareholder investments into profits.
Check out our latest analysis for PTT Synergy Group Berhad
The formula for return on equity is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity
So, based on the above formula, the ROE for PTT Synergy Group Berhad is:
8.3% = RM21m ÷ RM255m (Based on the trailing twelve months to June 2024).
The ‘return’ is the amount earned after tax over the last twelve months. So, this means that for every MYR1 of its shareholder’s investments, the company generates a profit of MYR0.08.
One simple way to determine if a company has a good return on equity is to compare it to the average for its industry. However, this method is only useful as a rough check, because companies do differ quite a bit within the same industry classification. Pleasingly, PTT Synergy Group Berhad has a superior ROE than the average (5.2%) in the Trade Distributors industry.
That’s what we like to see. 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. To know the 2 risks we have identified for PTT Synergy Group Berhad visit our risks dashboard for free.
Most companies need money — from somewhere — to grow their profits. The cash for investment can come from prior year profits (retained earnings), issuing new shares, or borrowing. In the first and second cases, the ROE will reflect this use of cash for investment in the business. In the latter case, the debt required for growth will boost returns, but will not impact the shareholders’ equity. In this manner the use of debt will boost ROE, even though the core economics of the business stay the same.
PTT Synergy Group Berhad clearly uses a high amount of debt to boost returns, as it has a debt to equity ratio of 1.37. Its ROE is quite low, even with the use of significant debt; that’s not a good result, in our opinion. 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.
Return on equity is useful for comparing the quality of different businesses. Companies that can achieve high returns on equity without too much debt are generally of good quality. All else being equal, a higher ROE is better.
But ROE is just one piece of a bigger puzzle, since high quality businesses often trade on high multiples of earnings. It is important to consider other factors, such as future profit growth — and how much investment is required going forward. So I think it may be worth checking this free this detailed graph of past earnings, revenue and cash flow.
Of course PTT Synergy Group Berhad may not be the best stock to buy. So you may wish to see this free collection of other companies that have high ROE and low debt.