What Is My ROI For Every RM1,000 In Stock Investment?

You need 3 ingredients to calculate your expected ROI from investing in a stock. They include:

1. Per Book Equity

It is calculated by dividing the company’s shareholders’ equity with its number of shares issued. For instance, Hua Yang Bhd has RM 533.48 Million in shareholders’ equity. It has issued 264.00 Million ordinary shares. Thus, Hua Yang Bhd’s per book equity is:

Per Book Equity
= RM 533.48 Million / 264.00 Million shares
= RM 2.021 a share

2. 5-Year ROE Average

ROE refers to Return on Equity. It tells us whether a company is efficient in making money from capital invested by existing shareholders. In this case, the formula presented in this article is only applicable for stocks that, at the very least, maintain its ROE figures. For Hua Yang Bhd, the ROE figures over the last 5 years is:

Hua Yang Bhd

5-Year ROE Average
= (11.47% + 19.90% + 21.07% + 21.23% + 23.73%) / 5 Years
= 19.48% per annum

Hence, the 5-Year average ROE figures would be 19.48% per annum. The calculation of your expected ROI would assume that Hua Yang Bhd is able or has the capability to generate ROE figures equivalent to its 5-Year Average.

3. Current Share Price

This is straightforward. Presently, Hua Yang Bhd is trading at RM 1.83 a share.

Putting Them Together:

Next, we would estimate the Earnings per Share (EPS) of Hua Yang Bhd for 2016. If Hua Yang Bhd continues to make ROE of 19.48% from its per book equity of RM 2.021 a share, thus,

EPS (2016)
= RM 2.021 x 19.48%
= RM 0.394

If you buy shares of Hua Yang Bhd at RM 1.83 a share, your ROI would be calculated as follows:

ROI (2016)
= (RM 0.394 / RM 1.83) x 100%
= 21.51%

Question #1:

Is this return plausible? Can Hua Yang Bhd make RM 0.394 in EPS for the financial year 2016?
Let us look at the actual EPS reported by Hua Yang Bhd over the past 5 years.

Figures in RM

In addition, from the latest quarterly report, Hua Yang Bhd has reported to make RM 0.336 in EPS over the 9-month period in financial year 2016. It has moved closer towards the estimated EPS of RM 0.394 calculated above.

Question #2:

Does it mean that share price would increase by 21.51%?

The ROI calculated above is based on the company’s earnings. It is not based on capital gains. Hence, it is not intended to mean that Hua Yang Bhd would increase in share prices by 21.51%.

Question #3:

Would I receive the full ROI of 21.51% in cash?

Nope.

Most likely, Hua Yang Bhd would retain a big portion of its earnings within the company’s accounts. The earnings retained would be used to finance the company’s working capital such as future land acquisitions and cost incurred to develop, launch and market its future property projects.

Over the past 5 years, Hua Yang Bhd’s dividend payout ratio (DPR) is as follows:

Figures in %

Thus, the 5-Year DPR average worked out to be 23.16%. Let us assume that Hua Yang Bhd maintains a DPR of 23.16% in 2016. Therefore, you will receive:

Dividends
= EPS (2016) x 23.16%
= RM 0.394 x 23.16%
= RM 0.091 a share

Thus, your dividend yield would be:

Dividend Yield (2016)
= (RM 0.091 / RM 1.83) x 100%
= 4.99%

Thus, the estimated dividend yield is higher than placing our money in Fixed Deposits. Is it attractive for investment? I would leave the judgement to you. After all, we are ultimately responsible for our personal investment decisions.

Caution!

Calculating ROI is just one of the many homeworks that a value investor would perform before investing in shares. Often, value investors would perform a full checklist of investment criterions before making an investment decision.

Hence, this article is intended to share the formula of calculating ROI before investing in a share. It is not intended to promote or discount the investment potential of Hua Yang Bhd. The author and publisher of this article hereby disclaims any rewards or risks derived from the direct or indirect usages of the materials discussed above.

This article is guest posted by Ian Tai, Creator of Bursaking.com.my. You may click to watch a video on How to Calculate ROI before Investing in Shares? Also, you may request your free copy of a 16-Page eBook on the ‘5 Different Methods on Making a Profit from the Stock Market’.

To request, just click ‘5 Different Methods on Making a Profit from the Stock Market’ and copy this message ‘I would like to have a free copy of ‘5 Different Methods on Making a Profit from the Stock Market’

Stock 101 Quiz