CPE Technology Berhad (KLSE:CPETECH) has experienced a challenging three-month period, seeing a 26% decline in its share price. To assess whether this trend could persist, we examined its underwhelming fundamentals that impact long-term market behavior. In this article, our focus will be on the ROE of CPE Technology Berhad.
Return on Equity (ROE) is a critical metric for shareholders, as it indicates how effectively their capital is being reinvested. In simpler terms, ROE gauges a company’s profitability in relation to its shareholders’ equity.
Discover our most recent analysis of CPE Technology Berhad
The formula to calculate ROE is as follows:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity
Thus, applying the above formula, we find that the ROE for CPE Technology Berhad is:
6.2% = RM20m ÷ RM318m (calculated based on the trailing twelve months ending December 2024).
The ‘return’ represents the earnings after tax over the past year, indicating that for every MYR1 of shareholders’ equity, the company generated MYR0.06 in profit.
Up to this point, we have established that ROE serves as a measure of profitability. Next, we should analyze how much profit the company retains or reinvests for future growth, which will provide insight into its growth potential. Generally, a higher ROE and profit retention suggests a greater growth rate for a company compared to those lacking these qualities.
At first glance, CPE Technology Berhad’s ROE might not seem impressive. However, a deeper analysis reveals that its ROE is comparable to the industry average of 6.6%. Nevertheless, it’s noteworthy that the company’s five-year net income decline rate stood at 4.7%, and considering that its ROE is already on the lower side, this could be contributing to the contraction in earnings growth.
When comparing CPE Technology Berhad’s growth with that of the industry, we observe that while the company’s earnings have been declining, the industry has enjoyed an earnings growth of 8.6% during the same timeframe. This disparity is concerning.
Earnings growth plays a significant role in stock valuation. Investors should assess whether anticipated growth or decline in earnings is factored into the stock’s price. This evaluation helps determine the stock’s potential direction—whether it is headed for clear success or potential pitfalls. One effective indicator of expected earnings growth is the P/E ratio, which illustrates the market’s willingness to pay for a stock based on its earnings projections. Therefore, it’s advisable to check if CPE Technology Berhad is trading at a high or low P/E ratio compared to its industry peers.
Story Continues
CPE Technology Berhad has a high three-year median payout ratio of 62% (indicating that only 38% of profits are retained). This suggests that the majority of the company’s earnings are distributed to shareholders, which accounts for its declining profitability. With only a small portion reinvested in the business, significant earnings growth seems unlikely. For insights into the two risks we have identified for CPE Technology Berhad, visit our risks dashboard for free.
Moreover, CPE Technology Berhad recently initiated dividend payments, indicating that management may believe shareholders prefer dividends despite ongoing earnings declines.
Overall, we would advise careful consideration before making any investment decisions regarding CPE Technology Berhad. The lack of earnings growth is primarily due to minimal profit retention, with what little is retained being reinvested at a very low rate of return. To gain a more comprehensive understanding of the company’s past performance, it may be beneficial to examine this free detailed graph of CPE Technology Berhad’s historical earnings, revenue, and cash flows.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts using an unbiased methodology, and our articles are not intended to constitute financial advice. This does not represent a recommendation to buy or sell any stock and does not consider your objectives or financial situation. We aim to deliver long-term focused analysis driven by fundamental data. Please note that our evaluation may not incorporate the latest price-sensitive company announcements or qualitative information. Simply Wall St holds no position in any of the mentioned stocks.
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