Hwa Tai Industries Berhad's (KLSE:HWATAI) Stock Is Rallying But Financials Look Ambiguous: Will The Momentum Continue?

Hwa Tai Industries Berhad (KLSE:HWATAI) has had a great run on the share market with its stock up by a significant 18% over the last three months. However, we wonder if the company's inconsistent financials would have any adverse impact on the current share price momentum. In this article, we decided to focus on Hwa Tai Industries Berhad's ROE.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Check out our latest analysis for Hwa Tai Industries 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 Hwa Tai Industries Berhad is:

4.6% = RM1.1m ÷ RM24m (Based on the trailing twelve months to December 2020).

The 'return' is the amount earned after tax over the last twelve months. So, this means that for every MYR1 of its shareholder's investments, the company generates a profit of MYR0.05.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

Hwa Tai Industries Berhad's Earnings Growth And 4.6% ROE

It is hard to argue that Hwa Tai Industries Berhad's ROE is much good in and of itself. Not just that, even compared to the industry average of 6.2%, the company's ROE is entirely unremarkable. Therefore, it might not be wrong to say that the five year net income decline of 36% seen by Hwa Tai Industries Berhad was possibly a result of it having a lower ROE. However, there could also be other factors causing the earnings to decline. For example, the business has allocated capital poorly, or that the company has a very high payout ratio.

As a next step, we compared Hwa Tai Industries Berhad's performance with the industry and found thatHwa Tai Industries Berhad's performance is depressing even when compared with the industry, which has shrunk its earnings at a rate of 6.1% in the same period, which is a slower than the company.

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 Hwa Tai Industries Berhad fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Hwa Tai Industries Berhad Efficiently Re-investing Its Profits?

Summary

Overall, we have mixed feelings about Hwa Tai Industries Berhad. While the company does have a high rate of reinvestment, the low ROE means that all that reinvestment is not reaping any benefit to its investors, and moreover, its having a negative impact on the earnings growth. 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 3 risks we have identified for Hwa Tai Industries 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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