It’s hard to get excited about OpenSys (M) Berhad’s (KLSE:OPENSYS) recent performance, with its stock price down 9.9% over the past three months. However, the company’s fundamentals appear to be fairly decent, and its long-term financial position is generally in line with future market price movements. In this article, we decided to focus on OpenSys (M) Berhad’s ROE.
Return on equity or ROE is an important factor to be considered by a shareholder as it indicates how effectively their capital is being reinvested. In other words, this reveals that the company has been successful in turning shareholder investments into profits.
Check out our latest analysis for OpenSys (M) Berhad.
How do you calculate return on equity?
The formula for calculating return on equity is as follows:
Return on equity = Net income (from continuing operations) ÷ Shareholders’ equity
So, based on the above formula, OpenSys (M) Berhad’s ROE is:
14% = RM13 million ÷ RM90 million (based on trailing 12 months to June 2024).
“Revenue” is the income a company has earned over the past year. Another way to think of it is that for every RM1 worth of shares, the company earned RM0.14 in profit.
Why is ROE important for profit growth?
So far, we have learned that ROE is a measure of a company’s profitability. Depending on how much of these profits a company reinvests or “retains”, and how effectively it does so, we are then able to assess a company’s earnings growth potential. Assuming all else is equal, companies with both higher return on equity and higher profit retention typically have higher growth rates when compared to companies that don’t have the same characteristics.
OpenSys (M) Berhad’s revenue growth and ROE 14%
At first glance, OpenSys (M) Berhad appears to have a decent ROE. The company’s ROE looks quite impressive when compared to the industry average ROE of 10%. Despite this, OpenSys (M) Berhad’s five-year net income growth was very low, averaging just 3.5%. This is generally not the case, as if a company has a high profitability ratio, then its revenue growth rate should also usually be high. Such a scenario is more likely to occur when a company pays out a large portion of its earnings as dividends or faces competitive pressures.
We then compared OpenSys (M) Berhad’s net income growth rate with the industry and found that the company’s growth rate is lower than the industry average growth rate of 12% over the same five-year period, which is a bit concerning.
Past revenue growth
The foundations that give a company value have a lot to do with its revenue growth. The next thing investors need to determine is whether the expected earnings growth is already built into the stock price, or the lack thereof. This can help you decide whether to position the stock for a bright or bleak future. Is OpenSys (M) Berhad significantly valued compared to other companies? These 3 valuation metrics may help you decide.
story continues
Is OpenSys (M) Berhad reinvesting its profits efficiently?
With a high median three-year dividend payout ratio of 53% (or retention rate of 47%), most of OpenSys (M) Berhad’s profits are paid out to shareholders. This undoubtedly contributes to the company’s low revenue growth rate.
Furthermore, OpenSys (M) Berhad has been paying dividends for at least 10 years, suggesting that maintaining the dividend is far more important to management, even if it comes at the expense of business growth.
summary
Overall, we feel that OpenSys (M) Berhad certainly has some positive factors to consider. However, although the company has a high ROE, its profit growth rate is very disappointing. This can be attributed to the fact that it reinvests only a small portion of its profits and pays out the rest as dividends. We don’t want to completely fire the company, but we do try to see how risky the business is in order to make more informed decisions about the company. To learn about the 3 risks we have identified for OpenSys (M) Berhad, visit our risks dashboard for free.
Do you have feedback on this article? Interested in its content? Please contact us directly. Alternatively, email our 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 using only unbiased methodologies, and articles are not intended to be financial advice. This is not a recommendation to buy or sell any stock, and does not take into account your objectives or financial situation. We aim to provide long-term, focused analysis based on fundamental data. Note that our analysis may not factor in the latest announcements or qualitative material from price-sensitive companies. Simply Wall St has no position in any stocks mentioned.
