Saturday, March 2

Do Its Financials Have Any Role To Play In Driving JF Technology Berhad’s (KLSE:JFTECH) Stock Up Recently?

JF Technology Berhad’s (KLSE:JFTECH) stock is up by a considerable 14% over the past three months. Given that stock prices are usually aligned with a company’s financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. Specifically, we decided to study JF Technology Berhad’s ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder’s equity.

See our latest analysis for JF Technology Berhad

How Is ROE Calculated?

ROE can be calculated by using the formula:

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

So, based on the above formula, the ROE for JF Technology Berhad is:

8.8% = RM12m ÷ RM133m (Based on the trailing twelve months to June 2023).

The ‘return’ is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each MYR1 of shareholders’ capital it has, the company made MYR0.09 in profit.

What Is The Relationship Between ROE And Earnings Growth?

So far, we’ve learned that ROE is a measure of a company’s profitability. Depending on how much of these profits the company reinvests or “retains”, and how effectively it does so, we are then able to assess a company’s earnings growth potential. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

JF Technology Berhad’s Earnings Growth And 8.8% ROE

At first glance, JF Technology Berhad’s ROE doesn’t look very promising. We then compared the company’s ROE to the broader industry and were disappointed to see that the ROE is lower than the industry average of 11%. In spite of this, JF Technology Berhad was able to grow its net income considerably, at a rate of 40% in the last five years. So, there might be other aspects that are positively influencing the company’s earnings growth. For instance, the company has a low payout ratio or is being managed efficiently.

We then compared JF Technology Berhad’s net income growth with the industry and we’re pleased to see that the company’s growth figure is higher when compared with the industry which has a growth rate of 19% in the same 5-year period.

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. One 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 prospects. So, you may want to check if JF Technology Berhad is trading on a high P/E or a low P/E, relative to its industry.

Is JF Technology Berhad Using Its Retained Earnings Effectively?

JF Technology Berhad’s significant three-year median payout ratio of 57% (where it is retaining only 43% of its income) suggests that the company has been able to achieve a high growth in earnings despite returning most of its income to shareholders.

Moreover, JF Technology Berhad is determined to keep sharing its profits with shareholders which we infer from its long history of nine years of paying a dividend.

Conclusion

On the whole, we do feel that JF Technology Berhad has some positive attributes. That is, quite an impressive growth in earnings. However, the low profit retention means that the company’s earnings growth could have been higher, had it been reinvesting a higher portion of its profits. Up till now, we’ve only made a short study of the company’s growth data. You can do your own research on JF Technology Berhad and see how it has performed in the past by looking at this FREE detailed graph of past earnings, revenue and cash flows.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of 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 factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.



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