DKSH Holdings (Malaysia) Berhad's (KLSE:DKSH) Stock Is Going Strong: Have Financials A Role To Play?

DKSH Holdings (Malaysia) Berhad's (KLSE:DKSH) stock is up by a considerable 18% over the past month. 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. Particularly, we will be paying attention to DKSH Holdings (Malaysia) Berhad's ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

See our latest analysis for DKSH 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 DKSH Holdings (Malaysia) Berhad is:

7.2% = RM46m ÷ RM638m (Based on the trailing twelve months to June 2020).

The 'return' is the profit over the last twelve months. So, this means that for every MYR1 of its shareholder's investments, the company generates a profit of MYR0.07.

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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.

DKSH Holdings (Malaysia) Berhad's Earnings Growth And 7.2% ROE

At first glance, DKSH Holdings (Malaysia) Berhad's ROE doesn't look very promising. However, the fact that the company's ROE is higher than the average industry ROE of 5.7%, is definitely interesting. But seeing DKSH Holdings (Malaysia) Berhad's five year net income decline of 2.4% over the past five years, we might rethink that. Bear in mind, the company does have a slightly low ROE. It is just that the industry ROE is lower. Therefore, the decline in earnings could also be the result of this.

We then compared DKSH Holdings (Malaysia) Berhad's performance with the industry and found that the company has shrunk its earnings at a slower rate than the industry earnings which has seen its earnings shrink by 3.2% in the same period. This does offer shareholders some relief

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. 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 DKSH Holdings (Malaysia) Berhad is trading on a high P/E or a low P/E, relative to its industry.

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

While the company did payout a portion of its dividend in the past, it currently doesn't pay a dividend. This implies that potentially all of its profits are being reinvested in the business.

Existing analyst estimates suggest that the company's future payout ratio is expected to drop to 23% over the next three years. The fact that the company's ROE is expected to rise to 8.7% over the same period is explained by the drop in the payout ratio.

Summary

Overall, we feel that DKSH Holdings (Malaysia) Berhad certainly does have some positive factors to consider. Yet, the low earnings growth is a bit concerning, especially given that the company has a respectable rate of return and is reinvesting a huge portion of its profits. By the looks of it, there could be some other factors, not necessarily in control of the business, that's preventing growth. Having said that, looking at current analyst estimates, we found that the company's earnings growth rate is expected to see a huge improvement. 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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