Could The Market Be Wrong About Sunmow Holding Berhad (KLSE:SUNMOW) Given Its Attractive Financial Prospects?

With its stock down 20% over the past week, it is easy to disregard Sunmow Holding Berhad (KLSE:SUNMOW). However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Particularly, we will be paying attention to Sunmow Holding Berhad's ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

Check out our latest analysis for Sunmow Holding 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 Sunmow Holding Berhad is:

15% = RM7.5m ÷ RM50m (Based on the trailing twelve months to June 2023).

The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every MYR1 worth of equity, the company was able to earn MYR0.15 in profit.

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.

Sunmow Holding Berhad's Earnings Growth And 15% ROE

At first glance, Sunmow Holding Berhad seems to have a decent ROE. Further, the company's ROE compares quite favorably to the industry average of 6.5%. This probably laid the ground for Sunmow Holding Berhad's significant 42% net income growth seen over the past five years. We reckon that there could also be other factors at play here. 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.

When you consider the fact that the industry earnings have shrunk at a rate of 0.6% in the same 5-year period, the company's net income growth is pretty remarkable.

Earnings growth is a huge factor in stock valuation. 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. If you're wondering about Sunmow Holding Berhad's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Sunmow Holding Berhad Making Efficient Use Of Its Profits?

The high three-year median payout ratio of 53% (implying that it keeps only 47% of profits) for Sunmow Holding Berhad suggests that the company's growth wasn't really hampered despite it returning most of the earnings to its shareholders.

While Sunmow Holding Berhad has seen growth in its earnings, it only recently started to pay a dividend. It is most likely that the company decided to impress new and existing shareholders with a dividend.

Summary

In total, we are pretty happy with Sunmow Holding Berhad's performance. 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. Up till now, we've only made a short study of the company's growth data. So it may be worth checking this free detailed graph of Sunmow Holding Berhad's past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.

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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.