Are Glostrext Berhad’s (KLSE:GLXT) mixed financial results the reason for its dismal stock market performance?

Glostrext Berhad (KLSE:GLXT) has had a rough three months with its share price down 17%. It seems that the market has completely ignored the positive aspects of the company’s fundamentals and has decided to focus more on the negative aspects. Long-term fundamentals are usually what drive market performance, so it’s worth paying close attention to them. We’ve specifically decided to study Glostrext Berhad’s ROE in this article.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it has received from its shareholders. In other words, it is a profitability ratio that measures the return on the capital provided by the company’s shareholders.

View our latest analysis for Glostrext Berhad

How do you calculate return on equity?

The formula for return on equity is:

Return on Equity = Net Profit (from continuing operations) ÷ Equity

Based on the above formula, the ROE for Glostrext Berhad is:

2.7% = RM1.5 million ÷ RM54 million (based on the trailing twelve months to March 2024).

‘Return’ refers to a company’s profit over the past year. One way to conceptualize this is that for every MYR1 of shareholders’ equity, the company made MYR0.03 in profit.

What is the relationship between ROE and earnings growth?

So far, we have learned that ROE is a measure of a company’s profitability. We now need to evaluate how much profit the company reinvests or “retains” for future growth, which in turn gives us an idea of ​​the company’s growth potential. Assuming all else remains the same, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that do not necessarily have these characteristics.

A comparison of Glostrext Berhad’s profit growth and 2.7% ROE

It is clear that Glostrext Berhad’s ROE is quite low. Not only that, but even compared to the industry average of 5.9%, the company’s ROE is completely unremarkable. Given the circumstances, the significant 8.9% decline in net profit that Glostrext Berhad has seen over the past five years is not surprising. We believe that other factors could be at play. For example, the company has a very high payout ratio or is facing competitive pressure.

The story continues

When we then compared it to the industry, where profits have fallen by 2.2% over the same 5-year period, we saw that Glostrext Berhad’s performance was still quite dismal. This is because the company saw its profits fall faster than the industry.

Earnings growth is an important metric to consider when valuing a stock. The investor should try to determine whether the expected growth or decline in earnings, whichever the case may be, is priced in. By doing this, they will get an idea of ​​whether the stock is headed for clear blue waters or if swampy waters await. If you are wondering what Glostrext Berhad is valuing, check out this metric of its price-to-earnings ratio, compared to its industry.

Is Glostrext Berhad reinvesting its profits efficiently?

Summary

Overall, we are a bit ambivalent about Glostrext Berhad’s performance. While it seems like it is retaining most of its profits given its low ROE, investors may not be benefiting from all that reinvestment. The low earnings growth suggests our theory is correct. In summary, we would be cautious with this company and one way to do that would be to look at the company’s risk profile. Our risk dashboard would include the 5 risks we have identified for Glostrext Berhad.

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This article from Simply Wall St is general in nature. We comment solely on historical data and analyst forecasts, using an objective methodology. Our articles are not intended as financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your objectives or financial situation. We aim to provide you with a long-term analysis driven by fundamental data. Please note that our analysis may not take into account the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in the shares mentioned.