Are Robust Financials Driving The Recent Rally In Powerwell Holdings Berhad's (KLSE:PWRWELL) Stock?

Most readers would already be aware that Powerwell Holdings Berhad's (KLSE:PWRWELL) stock increased significantly by 29% over the past three months. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. In this article, we decided to focus on Powerwell Holdings Berhad's ROE.

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.

Check out our latest analysis for Powerwell Holdings Berhad

How Is ROE Calculated?

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 Powerwell Holdings Berhad is:

23% = RM20m ÷ RM85m (Based on the trailing twelve months to March 2024).

The 'return' refers to a company's earnings over the last year. That means that for every MYR1 worth of shareholders' equity, the company generated MYR0.23 in profit.

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. 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.

Powerwell Holdings Berhad's Earnings Growth And 23% ROE

To begin with, Powerwell Holdings Berhad seems to have a respectable ROE. On comparing with the average industry ROE of 7.0% the company's ROE looks pretty remarkable. This certainly adds some context to Powerwell Holdings Berhad's exceptional 62% net income growth seen over the past five years. We reckon that there could also be other factors at play here. For instance, the company has a low payout ratio or is being managed efficiently.

Next, on comparing with the industry net income growth, we found that Powerwell Holdings Berhad's growth is quite high when compared to the industry average growth of 18% in the same period, which is great to see.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. 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 Powerwell Holdings Berhad is trading on a high P/E or a low P/E, relative to its industry.

Is Powerwell Holdings Berhad Making Efficient Use Of Its Profits?

The high three-year median payout ratio of 62% (implying that it keeps only 38% of profits) for Powerwell Holdings Berhad suggests that the company's growth wasn't really hampered despite it returning most of the earnings to its shareholders.

Along with seeing a growth in earnings, Powerwell Holdings Berhad only recently started paying dividends. Its quite possible that the company was looking to impress its shareholders.

Summary

On the whole, we feel that Powerwell Holdings Berhad's performance has been quite good. In particular, its high ROE is quite noteworthy and also the probable explanation behind its considerable earnings growth. 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. With that said, on studying the latest analyst forecasts, we found that while the company has seen growth in its past earnings, analysts expect its future earnings to shrink. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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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.

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