Most readers will already be aware that the stock of XOX Technology Berhad (KLSE:XOXTECH) has gained a remarkable 13% during the past week. Given that the market tends to reward strong financials over the long term, we wonder if that is the case in this case as well. In this article, we decided to focus on XOX Technology Berhad Cry.
ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investments received from its shareholders. In other words, it is a profitability ratio that measures the rate of return on capital provided by the company’s shareholders.
How is ROE calculated?
return on equity formula Is:
Return on equity = Net profit (from continuing operations) ÷ Shareholders’ equity
So, based on the above formula, the ROE for XOX Technology Berhad is:
19% = RM4.6m ÷ RM25m (based on trailing twelve months to June 2023).
‘Return’ refers to the earnings of the company for the previous year. One way to conceptualize this is that for every MYR1 of shareholders’ capital, the company made MYR0.19 profit.
Why is ROE Important for Earnings Growth?
We’ve already established that ROE serves as an efficient profit-generating gauge for a company’s future earnings. Depending on how much of these profits the company reinvests or “retains”, and how effectively it does so, we are then able to assess the company’s earnings growth potential. Assuming all else is equal, companies that have both high return on equity and high profit retention generally have higher growth rates than companies that do not have the same characteristics.
XOX Technology Berhad’s earnings growth and 19% ROE
To begin with, XOX Technologies Berhad has a respectable ROE. The company’s ROE looks quite remarkable when compared with the industry average ROE of 12%. Possibly as a result of this, XOX Technology Berhad has been able to witness an impressive net income growth of 43% over the last five years. However, there could be other reasons behind this increase. For example, it is possible that the company’s management has made some good strategic decisions, or that the company has a low payout ratio.
We then compared the net income growth of XOX Technology Berhad with the industry and we are pleased to see that the growth figure for the company is higher than that of the industry which has a growth rate of 4.4% over the same 5-year period.
Earnings growth is an important metric to consider when valuing a stock. Investors next need to determine whether the expected earnings growth, or lack thereof, is already factored into the stock price. This helps them determine whether a stock is poised for a bright or bleak future. If you are wondering about XOX Technology Berhad valuation, have a look It is a gauge of its price-to-earnings ratiocompared to its industry.
Is XOX Technology Berhad using its profits efficiently?
XOX Technology Berhad currently does not pay any dividends which essentially means that it is reinvesting all of its profits into the business. This certainly contributes to the high earnings growth number we discussed above.
Overall, we are quite pleased with the performance of XOX Technology Berhad. In particular, we like that the company is reinvesting heavily in its business and is generating high rate of returns. Not surprisingly, this has resulted in impressive earnings growth. If the company continues to grow its earnings this way, it could have a positive effect on its share price, given how earnings per share affect long-term share prices. Remember, the price of a stock also depends on the perceived risk. Therefore, before investing in any company, investors should be aware of the risks associated with it. You can view the 3 risks we have identified for XOX Technology Berhad by visiting our risk dashboard to free here on our forum.
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This article from Simply Wall St is general in nature. We only provide commentary based on historical data and analyst forecasts using unbiased methodologies and our articles are not intended to provide financial advice. It is not a recommendation to buy or sell any stock, and does not take into account your objectives, or your financial situation. We aim to bring you long term focused analysis driven by fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative material. Simply Wall St does not have any position in any of the stocks mentioned.