Is Harrisons Holdings (Malaysia) Berhad's (KLSE:HARISON) Recent Stock Performance Tethered To Its Strong Fundamentals?

Most readers would already be aware that Harrisons Holdings (Malaysia) Berhad's (KLSE:HARISON) stock increased significantly by 39% over the past three months. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. Specifically, we decided to study Harrisons Holdings (Malaysia) Berhad's ROE in this article.

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 Harrisons Holdings (Malaysia) Berhad

How Is ROE Calculated?

The formula for return on equity 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:

16% = RM68m ÷ RM420m (Based on the trailing twelve months to December 2022).

The 'return' is the yearly profit. One way to conceptualize this is that for each MYR1 of shareholders' capital it has, the company made MYR0.16 in profit.

What Has ROE Got To Do With Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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 16% ROE

At first glance, Harrisons Holdings (Malaysia) Berhad seems to have a decent ROE. Further, the company's ROE compares quite favorably to the industry average of 8.0%. Probably as a result of this, Harrisons Holdings (Malaysia) Berhad was able to see an impressive net income growth of 23% over the last five years. We believe that there might also be other aspects that are positively influencing the company's earnings growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

We then performed a comparison between Harrisons Holdings (Malaysia) Berhad's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 22% in the same period.

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. 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?

The three-year median payout ratio for Harrisons Holdings (Malaysia) Berhad is 46%, which is moderately low. The company is retaining the remaining 54%. By the looks of it, the dividend is well covered and Harrisons Holdings (Malaysia) Berhad is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Additionally, Harrisons Holdings (Malaysia) Berhad has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders.

Conclusion

On the whole, we feel that Harrisons Holdings (Malaysia) 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. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Not to forget, share price outcomes are also dependent on the potential risks a company may face. So it is important for investors to be aware of the risks involved in the business. You can see the 2 risks we have identified for Harrisons Holdings (Malaysia) Berhad by visiting our risks dashboard for free on our platform here.

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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.