GE-Shen Corporation Berhad’s financial data (KLSE: GESHEN) is too obscure to relate to current stock price dynamics: what do we have in store for the stock?

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GE-Shen Corporation Berhad (KLSE: GESHEN) has had a strong run in the stock market with a stock rising 53% in the past three months. But the main financial metrics of the company appear to differ across the board, leading us to wonder whether the current momentum in the company’s stock price can be sustained or not. In this article, we have decided to focus on the ROE of GE-Shen Corporation Berhad.

Return on equity or ROE is an important factor for a shareholder to consider because it tells them how much of their capital is being reinvested. Simply put, it is used to assess the profitability of a business against its equity.

See our latest review for GE-Shen Corporation Berhad

How do you calculate return on equity?

The ROE formula is:

Return on equity = Net income (from continuing operations) ÷ Equity

So, based on the above formula, the ROE of GE-Shen Corporation Berhad is:

1.3% = RM1.3m ÷ RM100m (based on the last twelve months up to December 2020).

The “return” is the income the business has earned over the past year. One way to conceptualize this is that for every MYR1 of shareholder capital it has, the company made a profit of MYR 0.01.

What does ROE have to do with profit growth?

So far we have learned that ROE measures how efficiently a business generates profits. Based on the portion of its profits that the company chooses to reinvest or “keep”, we are then able to assess a company’s future ability to generate profits. Assuming everything else is equal, companies that have both a higher return on equity and higher profit retention are generally those that have a higher growth rate compared to companies that do not. the same characteristics.

GE-Shen Corporation Berhad Profit Growth and ROE of 1.3%

It is clear that GE-Shen Corporation Berhad’s ROE is rather low. Not only that, even compared to the industry average of 8.7%, the company’s ROE is quite unremarkable. Therefore, it might not be wrong to say that the 56% drop in five-year net income observed by GE-Shen Corporation Berhad may have been the result of lower ROE. However, other factors could also lead to lower income. Such as – low retention of earnings or poor allocation of capital.

However, when we compared the growth of GE-Shen Corporation Berhad to that of the industry, we found that although the company’s profits were declining, the industry saw profit growth of 7.7%. during the same period. It is quite worrying.

KLSE: GESHEN Past profit growth February 28, 2021

The basis for attaching value to a business is, to a large extent, related to the growth of its profits. The investor should try to determine whether the expected growth or decline in earnings, whatever the case, is taken into account. In doing so, he will have an idea if the title is heading for clear blue waters or swampy waters ahead. 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 GE-Shen Corporation Berhad is trading high P / E or low P / E, relative to its industry.

Is GE-Shen Corporation Berhad Using Profits Efficiently?

summary

Overall, we believe that the performance shown by GE-Shen Corporation Berhad can be open to many interpretations. Even though he seems to be keeping most of his earnings, given the low ROE, investors may not be benefiting from all this reinvestment after all. The weak earnings growth suggests that our theory is correct. In conclusion, we would proceed cautiously with this company and one way to do that would be to look at the risk profile of the company. Our risk dashboard would include the 5 risks we have identified for GE-Shen Corporation Berhad.

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This Simply Wall St article is general in nature. It is not a recommendation to buy or sell any stock, and does not take into account your goals or your financial situation. We aim to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative information. Simply Wall St has no position in any of the stocks mentioned.
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