HeiTech Padu Berhad's (KLSE:HTPADU) Stock Has Shown Weakness Lately But Financial Prospects Look Decent: Is The Market Wrong?

HeiTech Padu Berhad (KLSE:HTPADU) has had a rough three months with its share price down 32%. However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. In this article, we decided to focus on HeiTech Padu 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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

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

13% = RM24m ÷ RM180m (Based on the trailing twelve months to September 2024).

The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each MYR1 of shareholders' capital it has, the company made MYR0.13 in profit.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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.

A Side By Side comparison of HeiTech Padu Berhad's Earnings Growth And 13% ROE

To start with, HeiTech Padu Berhad's ROE looks acceptable. Even when compared to the industry average of 13% the company's ROE looks quite decent. Despite this, HeiTech Padu Berhad's five year net income growth was quite flat over the past five years. So, there could be some other aspects that could potentially be preventing the company from growing. For example, it could be that the company has a high payout ratio or the business has allocated capital poorly, for instance.

We then compared HeiTech Padu Berhad's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 31% in the same 5-year period, which is a bit concerning.

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). 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 Making Efficient Use Of Its Profits?

HeiTech Padu Berhad doesn't pay any regular dividends, meaning that potentially all of its profits are being reinvested in the business. However, this doesn't explain why the company hasn't seen any growth. It looks like there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.

Conclusion

Overall, we feel that HeiTech Padu Berhad certainly does have some positive factors to consider. Yet, the low earnings growth is a bit concerning, especially given that the company has a high rate of return and is reinvesting ma huge portion of its profits. By the looks of it, there could be some other factors, not necessarily in control of the business, that's preventing growth. So far, we've only made a quick discussion around the company's earnings growth. So it may be worth checking this free detailed graph of HeiTech Padu Berhad's past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.

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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.