Is Samchem Holdings Berhad's(KLSE:SAMCHEM) Recent Stock Performance Tethered To Its Strong Fundamentals?

Samchem Holdings Berhad (KLSE:SAMCHEM) has had a great run on the share market with its stock up by a significant 13% over the last 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 Samchem Holdings Berhad's ROE.

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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

Check out our latest analysis for Samchem Holdings Berhad

How To 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 Samchem Holdings Berhad is:

17% = RM32m ÷ RM188m (Based on the trailing twelve months to September 2020).

The 'return' is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each MYR1 of shareholders' capital it has, the company made MYR0.17 in profit.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

A Side By Side comparison of Samchem Holdings Berhad's Earnings Growth And 17% ROE

At first glance, Samchem Holdings Berhad seems to have a decent ROE. Especially when compared to the industry average of 5.7% the company's ROE looks pretty impressive. Probably as a result of this, Samchem Holdings Berhad was able to see an impressive net income growth of 25% over the last five years. We believe that there might also be other aspects that are positively influencing the company's earnings growth. For instance, the company has a low payout ratio or is being managed efficiently.

Given that the industry shrunk its earnings at a rate of 3.2% 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. This then helps them determine if the stock is placed for a bright or bleak future. 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 Samchem Holdings Berhad is trading on a high P/E or a low P/E, relative to its industry.

Is Samchem Holdings Berhad Efficiently Re-investing Its Profits?

Samchem Holdings Berhad's three-year median payout ratio is a pretty moderate 40%, meaning the company retains 60% of its income. By the looks of it, the dividend is well covered and Samchem Holdings Berhad is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Additionally, Samchem Holdings 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.

Summary

On the whole, we feel that Samchem Holdings Berhad's performance has been quite good. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts 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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