Harrisons Holdings (Malaysia) Berhad (KLSE:HARISON) On An Uptrend: Could Fundamentals Be Driving The Stock?

Harrisons Holdings (Malaysia) Berhad's (KLSE:HARISON) stock is up by 8.0% over the past three months. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to investigate if the company's decent financials had a hand to play in the recent price move. Particularly, we will be paying attention to Harrisons 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. Put another way, it reveals the company's success at turning shareholder investments into profits.

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

8.8% = RM29m ÷ RM335m (Based on the trailing twelve months to September 2020).

The 'return' refers to a company's earnings over the last year. So, this means that for every MYR1 of its shareholder's investments, the company generates a profit of MYR0.09.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.

Harrisons Holdings (Malaysia) Berhad's Earnings Growth And 8.8% ROE

When you first look at it, Harrisons Holdings (Malaysia) Berhad's ROE doesn't look that attractive. However, the fact that the its ROE is quite higher to the industry average of 5.3% doesn't go unnoticed by us. This certainly adds some context to Harrisons Holdings (Malaysia) Berhad's moderate 10.0% net income growth seen over the past five years. That being said, the company does have a slightly low ROE to begin with, just that it is higher than the industry average. Hence there might be some other aspects that are causing earnings to grow. For example, it is possible that the broader industry is going through a high growth phase, or that the company has a low payout ratio.

Given that the industry shrunk its earnings at a rate of 4.0% in the same period, the net income growth of the company is quite impressive.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. Is Harrisons Holdings (Malaysia) Berhad fairly valued compared to other companies? These 3 valuation measures might help you decide.

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

Harrisons Holdings (Malaysia) Berhad has a significant three-year median payout ratio of 60%, meaning that it is left with only 40% to reinvest into its business. This implies that the company has been able to achieve decent earnings growth despite returning most of its profits to shareholders.

Besides, Harrisons Holdings (Malaysia) Berhad has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders.

Conclusion

On the whole, we do feel that Harrisons Holdings (Malaysia) Berhad has some positive attributes. Specifically, its respectable ROE which likely led to the considerable growth in earnings. Yet, the company is retaining a small portion of its profits. Which means that the company has been able to grow its earnings in spite of it, so that's not too bad. So far, we've only made a quick discussion around the company's earnings growth. To gain further insights into Harrisons Holdings (Malaysia) Berhad's past profit growth, check out this visualization of past earnings, revenue and cash flows.

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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.
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