It’s hard to get excited about HSS Engineers Berhad’s (KLSE:HSSEB) recent performance. The company’s stock price has fallen 13% in the past three months. However, if you look closely, you may notice that the key financial metrics look quite decent. This could mean the stock is likely to rise over time, given how markets typically reward more resilient long-term fundamentals. In this article, we decided to focus on HSS Engineers Berhad’s ROE.
Return on equity or ROE is a key measure used to evaluate how efficiently a company’s management is utilizing the company’s capital. In other words, this reveals that the company has been successful in turning shareholder investments into profits.
Check out our latest analysis for HSS Engineer Berhad.
How is ROE calculated?
Return on equity can be calculated using the following formula:
Return on equity = Net income (from continuing operations) ÷ Shareholders’ equity
So, based on the above formula, HSS Engineers Berhad’s ROE is:
6.6% = RM18 million ÷ RM274 million (based on the trailing twelve months to June 2024).
“Revenue” is the income a company has earned over the past year. Another way to think of it is that for every RM1 worth of shares, the company earned RM0.07 in profit.
What relationship does ROE have with profit growth?
It has already been established that ROE serves as an indicator of how efficiently a company will generate future profits. Depending on how much of these profits a company reinvests or “retains”, and how effectively it does so, we are then able to assess a company’s earnings growth potential. Assuming everything else remains constant, the higher the ROE and profit retention, the higher the company’s growth rate compared to companies that don’t necessarily have these characteristics.
A side-by-side comparison of HSS Engineers Berhad’s earnings growth and ROE of 6.6%.
When you first look at it, HSS Engineers Berhad’s ROE doesn’t look very attractive. However, upon closer inspection, we find that the company’s ROE is closer to the industry average of 8.1%. In particular, HSS Engineers Berhad’s exceptional net profit growth of 72% over the past five years is quite noteworthy. Considering that the ROE is not very high, we believe that there may also be other factors that can influence the company’s growth. For example, a company with a low dividend payout ratio or a company with efficient management.
We then compared HSS Engineers Berhad’s net income growth with its industry. We find that the company’s growth rate is high when compared to the industry, which registered a growth rate of 8.1% over the same five-year period.
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Past revenue growth
Earnings growth is a big factor in stock valuation. It’s important for investors to know whether the market is pricing in a company’s expected earnings growth (or decline). This can help you decide whether to position the stock for a bright or bleak future. Is HSSEB fairly valued? This infographic on the company’s intrinsic value contains everything you need to know.
Is HSS Engineers Berhad utilizing its profits efficiently?
HSS Engineers Berhad’s median three-year dividend payout ratio is 29%, which is quite low. The company will hold the remaining 71%. It seems, therefore, that HSS Engineers Berhad has delivered impressive growth in its earnings (as mentioned above) and reinvested them efficiently in a way that pays a well-covered dividend.
Additionally, HSS Engineers Berhad has been paying dividends for eight years. This means that the company is quite serious about sharing profits with shareholders. Based on our latest analyst data, the company’s future payout ratio over the next three years is expected to be around 25%. However, although HSS Engineers Berhad’s dividend payout ratio is not expected to change, its ROE is expected to rise to 18%.
summary
Overall, there seem to be some positive aspects to HSS Engineers Berhad’s business. Despite the low ROE, the company was able to achieve strong earnings growth due to its high reinvestment rate. Having said that, a review of the latest analyst forecasts indicates that the company’s future revenue growth is expected to slow. To know more about the company’s future revenue growth forecasts, take a look at this free report on analyst forecasts for the company.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodologies, and articles are not intended to be financial advice. This is not a recommendation to buy or sell any stock, and does not take into account your objectives or financial situation. We aim to provide long-term, focused analysis based on fundamental data. Note that our analysis may not factor in the latest announcements or qualitative material from price-sensitive companies. Simply Wall St has no position in any stocks mentioned.
