Do Its Financials Have Any Role To Play In Driving Poh Huat Resources Holdings Berhad's (KLSE:POHUAT) Stock Up Recently?

Most readers would already be aware that Poh Huat Resources Holdings Berhad's (KLSE:POHUAT) stock increased significantly by 32% over the past three months. As most would know, fundamentals are what usually guide market price movements over the long-term, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. In this article, we decided to focus on Poh Huat Resources 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. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Check out our latest analysis for Poh Huat Resources Holdings Berhad

How To Calculate Return On Equity?

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 Poh Huat Resources Holdings Berhad is:

12% = RM45m ÷ RM387m (Based on the trailing twelve months to July 2020).

The 'return' is the profit over the last twelve months. One way to conceptualize this is that for each MYR1 of shareholders' capital it has, the company made MYR0.12 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.

Poh Huat Resources Holdings Berhad's Earnings Growth And 12% ROE

At first glance, Poh Huat Resources Holdings Berhad's ROE doesn't look very promising. However, its ROE is similar to the industry average of 10%, so we won't completely dismiss the company. We can see that Poh Huat Resources Holdings Berhad has grown at a five year net income growth average rate of 3.0%, which is a bit on the lower side. Remember, the company's ROE is not particularly great to begin with. So this could also be one of the reasons behind the company's low growth in earnings.

Next, on comparing with the industry net income growth, we found that the growth figure reported by Poh Huat Resources Holdings Berhad compares quite favourably to the industry average, which shows a decline of 3.8% in the same period.

Earnings growth is a huge factor in stock valuation. 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 Poh Huat Resources Holdings Berhad is trading on a high P/E or a low P/E, relative to its industry.

Is Poh Huat Resources Holdings Berhad Efficiently Re-investing Its Profits?

Despite having a moderate three-year median payout ratio of 27% (implying that the company retains the remaining 73% of its income), Poh Huat Resources Holdings Berhad's earnings growth was quite low. So there could be some other explanation in that regard. For instance, the company's business may be deteriorating.

Additionally, Poh Huat Resources Holdings Berhad has paid dividends over a period of at least ten years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth. Looking at the current analyst consensus data, we can see that the company's future payout ratio is expected to rise to 36% over the next three years. Regardless, the ROE is not expected to change much for the company despite the higher expected payout ratio.

Summary

In total, it does look like Poh Huat Resources Holdings Berhad has some positive aspects to its business. With a high rate of reinvestment, albeit at a low ROE, the company has managed to see a considerable growth in its earnings. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page 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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