Is Silver Ridge Holdings Bhd.'s (KLSE:SRIDGE) Recent Stock Performance Influenced By Its Fundamentals In Any Way?

Silver Ridge Holdings Bhd (KLSE:SRIDGE) has had a great run on the share market with its stock up by a significant 46% over the last three months. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. Specifically, we decided to study Silver Ridge Holdings Bhd'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. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

See our latest analysis for Silver Ridge Holdings Bhd

How To Calculate Return On Equity?

Return on equity 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 Silver Ridge Holdings Bhd is:

2.3% = RM503k ÷ RM22m (Based on the trailing twelve months to June 2024).

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 MYR0.02 in profit.

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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. 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 Silver Ridge Holdings Bhd's Earnings Growth And 2.3% ROE

It is quite clear that Silver Ridge Holdings Bhd's ROE is rather low. Even when compared to the industry average of 9.7%, the ROE figure is pretty disappointing. However, the moderate 19% net income growth seen by Silver Ridge Holdings Bhd over the past five years is definitely a positive. Therefore, the growth in earnings could probably have been caused by other variables. For instance, the company has a low payout ratio or is being managed efficiently.

We then compared Silver Ridge Holdings Bhd's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 30% in the same 5-year period, which is a bit concerning.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. Is Silver Ridge Holdings Bhd fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Silver Ridge Holdings Bhd Using Its Retained Earnings Effectively?

Silver Ridge Holdings Bhd doesn't pay any regular dividends, meaning that all of its profits are being reinvested in the business, which explains the fair bit of earnings growth the company has seen.

Summary

On the whole, we do feel that Silver Ridge Holdings Bhd has some positive attributes. Namely, its respectable earnings growth, which it achieved due to it retaining most of its profits. However, given the low ROE, investors may not be benefitting from all that reinvestment after all. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. You can see the 3 risks we have identified for Silver Ridge Holdings Bhd 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.