Is Hap Seng Consolidated Berhad's (KLSE:HAPSENG) Recent Performance Underpinned By Weak Financials?

It is hard to get excited after looking at Hap Seng Consolidated Berhad's (KLSE:HAPSENG) recent performance, when its stock has declined 13% over the past three months. Given that stock prices are usually driven by a company’s fundamentals over the long term, which in this case look pretty weak, we decided to study the company's key financial indicators. Particularly, we will be paying attention to Hap Seng Consolidated Berhad's ROE today.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

See our latest analysis for Hap Seng Consolidated Berhad

How Do You Calculate Return On Equity?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Hap Seng Consolidated Berhad is:

5.4% = RM505m ÷ RM9.3b (Based on the trailing twelve months to June 2024).

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 MYR0.05.

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.

A Side By Side comparison of Hap Seng Consolidated Berhad's Earnings Growth And 5.4% ROE

It is quite clear that Hap Seng Consolidated Berhad's ROE is rather low. Even compared to the average industry ROE of 7.6%, the company's ROE is quite dismal. Therefore, Hap Seng Consolidated Berhad's flat earnings over the past five years can possibly be explained by the low ROE amongst other factors.

Next, on comparing with the industry net income growth, we found that the industry grew its earnings by 8.3% over the last few years.

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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about Hap Seng Consolidated Berhad's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Hap Seng Consolidated Berhad Using Its Retained Earnings Effectively?

Hap Seng Consolidated Berhad has a high three-year median payout ratio of 81% (or a retention ratio of 19%), meaning that the company is paying most of its profits as dividends to its shareholders. This does go some way in explaining why there's been no growth in its earnings.

In addition, Hap Seng Consolidated Berhad has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth.

Summary

In total, we would have a hard think before deciding on any investment action concerning Hap Seng Consolidated Berhad. As a result of its low ROE and lack of much reinvestment into the business, the company has seen a disappointing earnings growth rate. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. So it may be worth checking this free detailed graph of Hap Seng Consolidated Berhad's past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.

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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.