SHH Resources Holdings Berhad (KLSE: SHH) shares have risen significantly by 10% over the past week. However, we wonder if the company’s inconsistent financial data would negatively impact the current stock price dynamics. In particular, we will be paying close attention to the ROE of SHH Resources Holdings Berhad today.
ROE or return on equity is a useful tool to assess how effectively a company can generate the returns on investment it has received from its shareholders. In simpler terms, it measures a company’s profitability relative to equity.
See our latest review for SHH Resources Holdings Berhad
How to calculate return on equity?
Return on equity can be calculated using the formula:
Return on equity = Net income (from continuing operations) Ã· Equity
So, based on the above formula, the ROE of SHH Resources Holdings Berhad is:
1.1% = RM808k RM70m (Based on the last twelve months up to March 2021).
“Return” refers to a company’s profits over the past year. This therefore means that for each MYR1 of the investments of its shareholder, the company generates a profit of MYR0.01.
Why is ROE important for profit growth?
We have already established that ROE is an effective indicator of profit generation for a company’s future profits. Based on how much of those profits the company reinvests or âwithholdsâ and how efficiently it does so, we are then able to assess a company’s profit growth potential. Assuming everything is equal, companies that have both a higher return on equity and higher profit retention are generally those that have a higher growth rate than companies that do not have the same characteristics. .
SHH Resources Holdings Growth in earnings of Berhad and 1.1% of ROE
It is quite clear that the ROE of SHH Resources Holdings Berhad is rather low. Even compared to the industry average ROE of 12%, the company’s ROE is pretty dismal. Therefore, it might not be wrong to say that the 45% drop in five-year net income seen by SHH Resources Holdings Berhad may have been the result of lower ROE. However, other factors can also lead to lower income. For example, the company has misallocated capital, or the company has a very high payout rate.
Moreover, even compared to the industry, which slashed profits at a rate of 2.9% over the same period, we found that SHH Resources Holdings Berhad’s performance is quite disappointing, as it suggests that the company has cut its profits at a faster rate than the industry.
Profit growth is an important metric to consider when valuing a stock. It is important for an investor to know whether the market has factored in the expected growth (or decline) in company earnings. By doing this, they will have an idea if the stock is heading for clear blue waters or if swampy waters are waiting for them. If you are wondering how SHH Resources Holdings Berhad is valued, check out this gauge of its price / earnings ratio, relative to its industry.
SHH Resources Holdings Is Berhad Using Profits Efficiently?
Since SHH Resources Holdings Berhad does not pay any dividends, we infer that it keeps all of its profits, which is rather confusing considering the fact that there is no profit growth to show for it. . So there could be other factors at play here that could potentially hamper growth. For example, the company faced headwinds.
Overall, we believe that the performance posted by SHH Resources Holdings Berhad can be subject to many interpretations. Although the company has a high reinvestment rate, the low ROE means that all that reinvestment is not benefiting its investors and, moreover, it has a negative impact on profit growth. In conclusion, we would proceed with caution with this business and one way to do that would be to look at the risk profile of the business. Our risk dashboard would contain the 3 risks we have identified for SHH Resources Holdings Berhad.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative material. Simply Wall St has no position in any of the stocks mentioned.
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