Do Its Financials Have Any Role To Play In Driving Hap Seng Consolidated Berhad's (KLSE:HAPSENG) Stock Up Recently?

Most readers would already be aware that Hap Seng Consolidated Berhad's (KLSE:HAPSENG) stock increased significantly by 16% 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 Hap Seng Consolidated 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. Put another way, it reveals the company's success at turning shareholder investments into profits.

View our latest analysis for Hap Seng Consolidated Berhad

How To Calculate Return On Equity?

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 Hap Seng Consolidated Berhad is:

13% = RM1.1b ÷ RM8.7b (Based on the trailing twelve months to September 2020).

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 MYR0.13 in profit.

What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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. 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.

Hap Seng Consolidated Berhad's Earnings Growth And 13% ROE

To start with, Hap Seng Consolidated Berhad's ROE looks acceptable. Further, the company's ROE is similar to the industry average of 12%. However, we are curious as to how Hap Seng Consolidated Berhad's decent returns still resulted in flat growth for Hap Seng Consolidated Berhad in the past five years. So, there could be some other aspects that could potentially be preventing the company from growing. For example, it could be that the company has a high payout ratio or the business has allocated capital poorly, for instance.

We then performed a comparison between Hap Seng Consolidated Berhad's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 1.2% in the same period.

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 Hap Seng Consolidated Berhad is trading on a high P/E or a low P/E, relative to its industry.

Is Hap Seng Consolidated Berhad Efficiently Re-investing Its Profits?

With a high three-year median payout ratio of 78% (implying that the company keeps only 22% of its income) of its business to reinvest into its business), most of Hap Seng Consolidated Berhad's profits are being paid to shareholders, which explains the absence of growth in earnings.

Additionally, Hap Seng Consolidated Berhad has paid dividends over a period of at least ten years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth.

Summary

In total, it does look like Hap Seng Consolidated Berhad has some positive aspects to its business. Its earnings growth is decent, and the high ROE does contribute to that growth. However, investors could have benefitted even more from the high ROE, had the company been reinvesting more of its earnings. So far, we've only made a quick discussion around the company's earnings growth. To gain further insights into Hap Seng Consolidated Berhad's past profit growth, check out this visualization of past earnings, revenue and cash flows.

When trading Hap Seng Consolidated Berhad or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

This article by Simply Wall St is general in nature. 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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.