Does The Market Have A Low Tolerance For Techfast Holdings Berhad's (KLSE:TECFAST) Mixed Fundamentals?

Techfast Holdings Berhad (KLSE:TECFAST) has had a rough three months with its share price down 30%. It is possible that the markets have ignored the company's differing financials and decided to lean-in to the negative sentiment. Long-term fundamentals are usually what drive market outcomes, so it's worth paying close attention. In this article, we decided to focus on Techfast Holdings 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 Techfast Holdings Berhad

How Do You 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 Techfast Holdings Berhad is:

5.6% = RM2.1m ÷ RM37m (Based on the trailing twelve months to December 2020).

The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each MYR1 of shareholders' capital it has, the company made MYR0.06 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. 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 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.

Techfast Holdings Berhad's Earnings Growth And 5.6% ROE

As you can see, Techfast Holdings Berhad's ROE looks pretty weak. Further, we noted that the company's ROE is similar to the industry average of 6.8%. Accordingly, Techfast Holdings Berhad's low net income growth of 3.8% over the past five years can possibly be explained by the low ROE amongst other factors.

Next, on comparing Techfast Holdings Berhad's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 4.6% in the same period.

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). 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 Techfast Holdings Berhad is trading on a high P/E or a low P/E, relative to its industry.

Is Techfast Holdings Berhad Using Its Retained Earnings Effectively?

With a high three-year median payout ratio of 59% (or a retention ratio of 41%), most of Techfast Holdings Berhad's profits are being paid to shareholders. This definitely contributes to the low earnings growth seen by the company.

Additionally, Techfast Holdings Berhad has paid dividends over a period of eight years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth.

Conclusion

In total, we're a bit ambivalent about Techfast Holdings Berhad's performance. Although the company has shown a fair bit of growth in earnings, the reinvestment rate is low. Meaning, the earnings growth number could have been significantly higher had the company been retaining more of its profits and reinvesting that at a higher rate of return. Wrapping up, we would proceed with caution with this company and one way of doing that would be to look at the risk profile of the business. Our risks dashboard would have the 5 risks we have identified for Techfast Holdings Berhad.

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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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