Yahoo Finance Did G K Goh Holdings Limited (SGX:G41) Create Value For Investors Over The Past Year?
I am writing today to help inform people who are new to the stock market and want to begin learning the link between G K Goh Holdings Limited (SGX:G41)’s return fundamentals and stock market performance.
G K Goh Holdings Limited (SGX:G41) generated a below-average return on equity of 3.82% in the past 12 months, while its industry returned 16.06%. Though G41’s recent performance is underwhelming, it is useful to understand what ROE is made up of and how it should be interpreted. Knowing these components can change your views on G41’s below-average returns. I will take you through how metrics such as financial leverage impact ROE which may affect the overall sustainability of G41’s returns. Check out our latest analysis for G. K. Goh Holdings
What you must know about ROE
Return on Equity (ROE) is a measure of G. K. Goh Holdings’s profit relative to its shareholders’ equity. It essentially shows how much the company can generate in earnings given the amount of equity it has raised. Generally speaking, a higher ROE is preferred; however, there are other factors we must also consider before making any conclusions.
Return on Equity = Net Profit ÷ Shareholders Equity
ROE is measured against cost of equity in order to determine the efficiency of G. K. Goh Holdings’s equity capital deployed. Its cost of equity is 11.26%. Since G. K. Goh Holdings’s return does not cover its cost, with a difference of -7.44%, this means its current use of equity is not efficient and not sustainable. Very simply, G. K. Goh Holdings pays more for its capital than what it generates in return. ROE can be broken down into three different ratios: net profit margin, asset turnover, and financial leverage. This is called the Dupont Formula:
Dupont Formula
ROE = profit margin × asset turnover × financial leverage
ROE = (annual net profit ÷ sales) × (sales ÷ assets) × (assets ÷ shareholders’ equity)
ROE = annual net profit ÷ shareholders’ equity
Basically, profit margin measures how much of revenue trickles down into earnings which illustrates how efficient the business is with its cost management. The other component, asset turnover, illustrates how much revenue G. K. Goh Holdings can make from its asset base. And finally, financial leverage is simply how much of assets are funded by equity, which exhibits how sustainable the company’s capital structure is. Since financial leverage can artificially inflate ROE, we need to look at how much debt G. K. Goh Holdings currently has. The debt-to-equity ratio currently stands at a low 28.27%, meaning G. K. Goh Holdings still has headroom to borrow debt to increase profits.
Next Steps:
ROE is a simple yet informative ratio, illustrating the various components that each measure the quality of the overall stock. G. K. Goh Holdings’s below-industry ROE is disappointing, furthermore, its returns were not even high enough to cover its own cost of equity. However, ROE is not likely to be inflated by excessive debt funding, giving shareholders more conviction in the sustainability of returns, which has headroom to increase further. Although ROE can be a useful metric, it is only a small part of diligent research.
For G. K. Goh Holdings, there are three essential aspects you should further examine:
Financial Health: Does it have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
Valuation: What is G. K. Goh Holdings worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether G. K. Goh Holdings is currently mispriced by the market.
Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of G. K. Goh Holdings? Explore our interactive list of stocks with large growth potential to get an idea of what else is out there you may be missing!
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.
