Most readers would already be aware that SHH Resources Holdings Berhad's (KLSE:SHH) stock increased significantly by 36% over the past three months. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. Specifically, we decided to study SHH Resources Holdings Berhad's ROE in this article.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
View our latest analysis for SHH Resources Holdings Berhad
How Is ROE Calculated?
ROE 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 SHH Resources Holdings Berhad is:
10% = RM7.9m ÷ RM77m (Based on the trailing twelve months to December 2022).
The 'return' is the amount earned after tax over the last twelve months. That means that for every MYR1 worth of shareholders' equity, the company generated MYR0.10 in profit.
What Has ROE Got To Do With Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.
SHH Resources Holdings Berhad's Earnings Growth And 10% ROE
On the face of it, SHH Resources Holdings Berhad's ROE is not much to talk about. Yet, a closer study shows that the company's ROE is similar to the industry average of 10%. Particularly, the exceptional 68% net income growth seen by SHH Resources Holdings Berhad over the past five years is pretty remarkable. Given the slightly low ROE, it is likely that there could be some other aspects that are driving this growth. 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.
Next, on comparing with the industry net income growth, we found that SHH Resources Holdings Berhad's growth is quite high when compared to the industry average growth of 17% in the same period, which is great to see.
Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about SHH Resources Holdings Berhad's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.