Is HSS Engineers Berhad's (KLSE:HSSEB) Stock Price Struggling As A Result Of Its Mixed Financials?

It is hard to get excited after looking at HSS Engineers Berhad's (KLSE:HSSEB) recent performance, when its stock has declined 18% over the past month. It is possible that the markets have ignored the company's differing financials and decided to lean-in to the negative sentiment. Stock prices are usually driven by a company’s financial performance over the long term, and therefore we decided to pay more attention to the company's financial performance. In this article, we decided to focus on HSS Engineers Berhad's ROE.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for HSS Engineers Berhad

How Do You Calculate Return On Equity?

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 HSS Engineers Berhad is:

4.7% = RM11m ÷ RM222m (Based on the trailing twelve months to September 2020).

The 'return' is the yearly profit. That means that for every MYR1 worth of shareholders' equity, the company generated MYR0.05 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. 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.

HSS Engineers Berhad's Earnings Growth And 4.7% ROE

As you can see, HSS Engineers Berhad's ROE looks pretty weak. An industry comparison shows that the company's ROE is not much different from the industry average of 4.7% either. Given the circumstances, the significant decline in net income by 37% seen by HSS Engineers Berhad over the last five years is not surprising.

Furthermore, even when compared to the industry, which has been shrinking its earnings at a rate 7.6% in the same period, we found that HSS Engineers Berhad's performance is pretty disappointing, as it suggests that the company has been shrunk its earnings at a rate faster than the industry.

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. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about HSS Engineers Berhad's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is HSS Engineers 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.

Our latest analyst data shows that the future payout ratio of the company is expected to drop to 7.2% over the next three years. The fact that the company's ROE is expected to rise to 7.2% over the same period is explained by the drop in the payout ratio.

Summary

In total, we're a bit ambivalent about HSS Engineers Berhad's performance. Even though it appears to be retaining most of its profits, given the low ROE, investors may not be benefitting from all that reinvestment after all. The low earnings growth suggests our theory correct. That being so, the latest industry analyst forecasts show that the analysts are expecting to see a huge improvement in the company's earnings growth rate. 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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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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