Is Poh Huat Resources Holdings Berhad's (KLSE:POHUAT) Stock's Recent Performance A Reflection Of Its Financial Health?

Poh Huat Resources Holdings Berhad's (KLSE:POHUAT) stock up by 3.0% over the past week. Given its impressive performance, we decided to study the company's key financial indicators as a company's long-term fundamentals usually dictate market outcomes. Particularly, we will be paying attention to Poh Huat Resources Holdings 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 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 Poh Huat Resources Holdings Berhad

How Is ROE Calculated?

The formula for return on equity is:

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% = RM52m ÷ RM427m (Based on the trailing twelve months to October 2020).

The 'return' is the profit over the last twelve months. Another way to think of that is that for every MYR1 worth of equity, the company was able to earn MYR0.12 in profit.

What Has ROE Got To Do With 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. 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

To start with, Poh Huat Resources Holdings Berhad's ROE looks acceptable. Further, the company's ROE is similar to the industry average of 11%. However, we are curious as to how Poh Huat Resources Holdings Berhad's decent returns still resulted in flat growth for Poh Huat Resources Holdings Berhad in the past five years. So, there could be some other aspects that could potentially be preventing the company from growing. These include low earnings retention or poor allocation of capital.

As a next step, we compared Poh Huat Resources Holdings Berhad's net income growth with the industry and discovered that the company's growth is slightly better than the industry which has shrunk at a rate of 0.8% in the same period.

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. Is POHUAT fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Poh Huat Resources Holdings Berhad Making Efficient Use Of Its Profits?

In spite of a normal three-year median payout ratio of 28% (or a retention ratio of 72%), Poh Huat Resources Holdings Berhad hasn't seen much growth in its earnings. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.

In addition, Poh Huat Resources Holdings Berhad has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to rise to 37% over the next three years. However, the company's ROE is not expected to change by much despite the higher expected payout ratio.

Conclusion

In total, we are pretty happy with Poh Huat Resources Holdings Berhad's performance. 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 are expected to accelerate. 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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