Is Synergy House Berhad's (KLSE:SYNERGY) Stock's Recent Performance Being Led By Its Attractive Financial Prospects?

Synergy House Berhad (KLSE:SYNERGY) has had a great run on the share market with its stock up by a significant 33% over the last three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. In this article, we decided to focus on Synergy House Berhad's ROE.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

See our latest analysis for Synergy House Berhad

How To Calculate Return On Equity?

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 Synergy House Berhad is:

27% = RM27m ÷ RM101m (Based on the trailing twelve months to December 2023).

The 'return' is the profit over the last twelve months. Another way to think of that is that for every MYR1 worth of equity, the company was able to earn MYR0.27 in profit.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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 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 Synergy House Berhad's Earnings Growth And 27% ROE

Firstly, we acknowledge that Synergy House Berhad has a significantly high ROE. Additionally, the company's ROE is higher compared to the industry average of 8.5% which is quite remarkable. As a result, Synergy House Berhad's exceptional 23% net income growth seen over the past five years, doesn't come as a surprise.

As a next step, we compared Synergy House Berhad's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 8.8%.

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. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Synergy House Berhad's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Synergy House Berhad Using Its Retained Earnings Effectively?

Synergy House Berhad's three-year median payout ratio is a pretty moderate 29%, meaning the company retains 71% of its income. So it seems that Synergy House 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.

Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 31%. Therefore, the company's future ROE is also not expected to change by much with analysts predicting an ROE of 32%.

Conclusion

On the whole, we feel that Synergy House 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. On studying current analyst estimates, we found that analysts expect the company to continue its recent growth streak. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page 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.