Can Mixed Fundamentals Have A Negative Impact on HeiTech Padu Berhad (KLSE:HTPADU) Current Share Price Momentum?

Most readers would already be aware that HeiTech Padu Berhad's (KLSE:HTPADU) stock increased significantly by 101% over the past three months. However, we wonder if the company's inconsistent financials would have any adverse impact on the current share price momentum. Specifically, we decided to study HeiTech Padu Berhad's ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for HeiTech Padu 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 HeiTech Padu Berhad is:

4.7% = RM7.2m ÷ RM154m (Based on the trailing twelve months to December 2023).

The 'return' is the income the business earned over the last year. So, this means that for every MYR1 of its shareholder's investments, the company generates a profit of MYR0.05.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.

A Side By Side comparison of HeiTech Padu Berhad's Earnings Growth And 4.7% ROE

It is hard to argue that HeiTech Padu Berhad's ROE is much good in and of itself. Even compared to the average industry ROE of 12%, the company's ROE is quite dismal. Thus, the low net income growth of 3.8% seen by HeiTech Padu Berhad over the past five years could probably be the result of it having a lower ROE.

As a next step, we compared HeiTech Padu Berhad's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 26% in the same period.

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is HeiTech Padu Berhad fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is HeiTech Padu Berhad Using Its Retained Earnings Effectively?

HeiTech Padu Berhad doesn't pay any regular dividends, which means that it is retaining all of its earnings. However, this doesn't explain the low earnings growth the company has seen. So there could be some other explanation in that regard. For instance, the company's business may be deteriorating.

Conclusion

In total, we're a bit ambivalent about HeiTech Padu Berhad's performance. 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. You can see the 3 risks we have identified for HeiTech Padu Berhad by visiting our risks dashboard for free on our platform here.

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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.