Solarvest Holdings Berhad's (KLSE:SLVEST) Stock Has Shown Weakness Lately But Financial Prospects Look Decent: Is The Market Wrong?
Simply Wall St
4 min read
It is hard to get excited after looking at Solarvest Holdings Berhad's (KLSE:SLVEST) recent performance, when its stock has declined 15% over the past three months. But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. Particularly, we will be paying attention to Solarvest Holdings 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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Solarvest Holdings Berhad is:
9.7% = RM19m ÷ RM191m (Based on the trailing twelve months to December 2022).
The 'return' is the yearly profit. So, this means that for every MYR1 of its shareholder's investments, the company generates a profit of MYR0.10.
Why Is ROE Important For Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.
Solarvest Holdings Berhad's Earnings Growth And 9.7% ROE
At first glance, Solarvest Holdings Berhad's ROE doesn't look very promising. However, its ROE is similar to the industry average of 9.7%, so we won't completely dismiss the company. Having said that, Solarvest Holdings Berhad has shown a modest net income growth of 5.6% over the past five years. 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.
We then performed a comparison between Solarvest Holdings Berhad's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 4.8% in the same period.
KLSE:SLVEST Past Earnings Growth May 1st 2023
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. 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 Solarvest Holdings Berhad is trading on a high P/E or a low P/E, relative to its industry.
Is Solarvest Holdings Berhad Using Its Retained Earnings Effectively?
With a three-year median payout ratio of 26% (implying that the company retains 74% of its profits), it seems that Solarvest Holdings Berhad is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that's well covered.
While Solarvest Holdings Berhad has seen growth in its earnings, it only recently started to pay a dividend. It is most likely that the company decided to impress new and existing shareholders with a dividend. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 23%. Regardless, the future ROE for Solarvest Holdings Berhad is predicted to rise to 14% despite there being not much change expected in its payout ratio.
Summary
In total, it does look like Solarvest Holdings Berhad has some positive aspects to its business. Despite its low rate of return, the fact that the company reinvests a very high portion of its profits into its business, no doubt contributed to its high earnings growth. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.
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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.
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