Can Zantat Holdings Berhad’s (KLSE:ZANTAT) ROE Continue to Beat the Industry Average?

One of the best investments we can make is in our own knowledge and skills. With that in mind, this article will explain how we can use return on equity (ROE) to better understand a company. To make the lesson practical, we’ll use ROE to better understand Zantat Holdings Berhad (KLSE:ZANTAT).

ROE or return on equity is a useful tool for assessing how effectively a company can generate returns on the investments it receives from its shareholders. In simple terms, it assesses the profitability of a company in relation to its equity capital.

Check out our latest analysis for Zantat Holdings Berhad

ROE can be calculated using the formula:

Return on equity = net profit (from continuing operations) ÷ equity

So, based on the above formula, the ROE for Zantat Holdings Berhad is:

11% = RM6.8mil ÷ RM64mil (Based on trailing twelve months to September 2024).

“Return” refers to a company’s profit over the last year. One way to understand this is that for every MYR1 of shareholders’ capital, the company made a profit of MYR0.11.

By comparing a company’s ROE to its industry average, we can quickly assess how good it is. However, this method is only useful for a rough check, as companies within the same industry classification differ greatly. Pleasingly, Zantat Holdings Berhad has an ROE that is above the chemical industry average (5.1%).

That’s what we like to see. However, a high ROE does not always mean high profitability. Aside from changes in net income, a high ROE can also be the result of high debt to equity, which indicates risk.

Virtually all companies need money to invest in the business and increase profits. This money can come from issuing shares, retained earnings, or debt. In the case of the first and second options, the ROE will reflect this use of cash for growth. In the latter case, the debt used for growth improves returns but has no impact on total equity. In this way, the use of debt will increase ROE even if the company’s core economics remain the same.

Even though Zantat Holdings Berhad uses debt, its debt-to-equity ratio of 0.16 is still low. The ROE isn’t particularly impressive, but the debt is quite modest, so the company probably has real potential. Careful use of debt to increase returns is often very good for shareholders. However, this could affect the company’s ability to take advantage of future opportunities.

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