Will Weakness in Harrisons Holdings (Malaysia) Berhad's (KLSE:HARISON) Stock Prove Temporary Given Strong Fundamentals?

Fri, Oct 20, 2023, 6:32 PM 4 min read

With its stock down 4.4% over the past three months, it is easy to disregard Harrisons Holdings (Malaysia) Berhad (KLSE:HARISON). However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Particularly, we will be paying attention to Harrisons Holdings (Malaysia) Berhad's ROE today.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

See our latest analysis for Harrisons Holdings (Malaysia) Berhad

How Is ROE Calculated?

Return on equity can be calculated by using the formula:

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

So, based on the above formula, the ROE for Harrisons Holdings (Malaysia) Berhad is:

16% = RM73m ÷ RM457m (Based on the trailing twelve months to June 2023).

The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every MYR1 worth of equity, the company was able to earn MYR0.16 in profit.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

A Side By Side comparison of Harrisons Holdings (Malaysia) Berhad's Earnings Growth And 16% ROE

To begin with, Harrisons Holdings (Malaysia) Berhad seems to have a respectable ROE. On comparing with the average industry ROE of 4.4% the company's ROE looks pretty remarkable. This probably laid the ground for Harrisons Holdings (Malaysia) Berhad's significant 27% net income growth seen over the past five years. We reckon that there could also be other factors at play here. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

We then compared Harrisons Holdings (Malaysia) Berhad's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 17% in the same 5-year period.

past-earnings-growth

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Harrisons Holdings (Malaysia) Berhad is trading on a high P/E or a low P/E, relative to its industry.

Is Harrisons Holdings (Malaysia) Berhad Using Its Retained Earnings Effectively?

Harrisons Holdings (Malaysia) Berhad has a three-year median payout ratio of 46% (where it is retaining 54% of its income) which is not too low or not too high. So it seems that Harrisons Holdings (Malaysia) Berhad is reinvesting efficiently in a way that it sees impressive growth in its earnings (discussed above) and pays a dividend that's well covered.

Besides, Harrisons Holdings (Malaysia) Berhad has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders.

Conclusion

On the whole, we feel that Harrisons Holdings (Malaysia) Berhad's performance has been quite good. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Remember, the price of a stock is also dependent on the perceived risk. Therefore investors must keep themselves informed about the risks involved before investing in any company. Our risks dashboard will have the 1 risk we have identified for Harrisons Holdings (Malaysia) Berhad.

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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.