Crescendo Corporation Berhad (KLSE:CRESNDO) has had a great run on the share market with its stock up by a significant 30% over the last month. 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. In this article, we decided to focus on Crescendo Corporation Berhad's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for Crescendo Corporation Berhad

How Is ROE Calculated?

The formula for ROE is:

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

So, based on the above formula, the ROE for Crescendo Corporation Berhad is:

5.6% = RM57m ÷ RM1.0b (Based on the trailing twelve months to January 2024).

The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each MYR1 of shareholders' capital it has, the company made MYR0.06 in profit.

What Has ROE Got To Do With Earnings Growth?

We have 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 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.

A Side By Side comparison of Crescendo Corporation Berhad's Earnings Growth And 5.6% ROE

When you first look at it, Crescendo Corporation Berhad's ROE doesn't look that attractive. However, the fact that the its ROE is quite higher to the industry average of 4.1% doesn't go unnoticed by us. However, Crescendo Corporation Berhad has seen a flattish net income growth over the past five years, which is not saying much. Bear in mind, the company does have a slightly low ROE. It is just that the industry ROE is lower. Hence, this goes some way in explaining the flat earnings growth.

We then compared Crescendo Corporation Berhad's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 6.5% in the same 5-year period, which is a bit concerning.

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Crescendo Corporation Berhad fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Crescendo Corporation Berhad Efficiently Re-investing Its Profits?

In spite of a normal three-year median payout ratio of 42% (or a retention ratio of 58%), Crescendo Corporation Berhad hasn't seen much growth in its earnings. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.

Additionally, Crescendo Corporation Berhad has paid dividends over a period of at least ten years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth.

Summary

In total, it does look like Crescendo Corporation Berhad has some positive aspects to its business. Although, we are disappointed to see a lack of growth in earnings even in spite of a moderate ROE and and a high reinvestment rate. We believe that there might be some outside factors that could be having a negative impact on the business. So far, we've only made a quick discussion around the company's earnings growth. So it may be worth checking this free detailed graph of Crescendo Corporation Berhad's past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.

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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.