Solarvest Holdings Berhad's (KLSE:SLVEST) Stock Is Going Strong: Is the Market Following Fundamentals?

Most readers would already be aware that Solarvest Holdings Berhad's (KLSE:SLVEST) stock increased significantly by 43% over the past three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Particularly, we will be paying attention to Solarvest Holdings Berhad's ROE today.

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 Solarvest Holdings 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 Solarvest Holdings Berhad is:

15% = RM13m ÷ RM86m (Based on the trailing twelve months to September 2020).

The 'return' is the yearly profit. Another way to think of that is that for every MYR1 worth of equity, the company was able to earn MYR0.15 in profit.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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 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.

A Side By Side comparison of Solarvest Holdings Berhad's Earnings Growth And 15% ROE

At first glance, Solarvest Holdings Berhad seems to have a decent ROE. Especially when compared to the industry average of 5.4% the company's ROE looks pretty impressive. This certainly adds some context to Solarvest Holdings Berhad's exceptional 21% net income growth seen over the past five years. We reckon that there could also be other factors at play here. Such as - high earnings retention or an efficient management in place.

Next, on comparing with the industry net income growth, we found that the growth figure reported by Solarvest Holdings Berhad compares quite favourably to the industry average, which shows a decline of 9.3% in the same period.

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. 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 Solarvest Holdings Berhad is trading on a high P/E or a low P/E, relative to its industry.

Is Solarvest Holdings Berhad Making Efficient Use Of Its Profits?

Solarvest Holdings Berhad has a really low three-year median payout ratio of 20%, meaning that it has the remaining 80% left over to reinvest into its business. So it looks like Solarvest Holdings Berhad is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Summary

In total, we are pretty happy with Solarvest Holdings Berhad's performance. 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. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. 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. 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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