It's easy to ignore HPP Holdings Berhad (KLSE:HPPHB), with its share price down 5.6% over the past three months. Since a company's long-term performance usually drives market outcomes, we decided to examine the company's financials to determine if the downward trend continues. In particular, I would like to pay attention to HPP Holdings Berhad's ROE today.
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, it is a profitability ratio that measures the rate of return on the capital provided by a company's shareholders.
Check out our latest analysis for HPP Holdings Berhad.
How do you calculate return on equity?
of ROE calculation formula teeth:
Return on equity = Net income (from continuing operations) ÷ Shareholders' equity
So, based on the above formula, HPP Holdings Berhad's ROE is:
5.5% = RM6.9m ÷ RM124m (Based on trailing 12 months to November 2023).
“Return” is the profit over the past 12 months. One way he conceptualizes this is that for every RM1 of shareholders' equity, the company made a profit of MYR0.06.
What is the relationship between ROE and profit growth rate?
So far, we have learned that ROE measures how efficiently a company is generating its 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. All else being equal, companies with higher return on equity and profit retention typically have higher growth rates compared to companies that don't have the same characteristics.
A side-by-side comparison of HPP Holdings Berhad's earnings growth rate and ROE 5.5%
It's clear that HPP Holdings Berhad's ROE is quite low. Even compared to the industry average ROE of 7.0%, the company's ROE is quite pathetic. Therefore, it might not be wrong to say that HPP Holdings Berhad's 9.4% decline in net profit over his five years is probably a result of his ROE falling. However, other factors may reduce revenue. For example: low revenue retention or inadequate capital allocation.
However, when we compare HPP Holdings Berhad's growth with its industry, we find that while the company's revenues have been shrinking, the industry has seen its revenues grow at 11% over the same period. This is very worrying.
Earnings growth is an important metric to consider when evaluating a stock. The next thing investors need to determine is whether the expected earnings growth is already built into the stock price, or the lack thereof. This can help you decide whether to position the stock for a bright or bleak future. If you're curious about HPP Holdings Berhad's valuation, check out this metric of its price-to-earnings ratio compared to its industry.
Is HPP Holdings Berhad using its profits efficiently?
HPP Holdings Berhad's declining profits are not surprising given that the company spends most of its profits on dividends, judging by its three-year median payout ratio of 61% (or retention rate of 39%) . There is little money left to reinvest in the business, so earnings are unlikely to increase. Your Risks dashboard should now display the 2 risks we have identified for HPP Holdings Berhad.
Furthermore, HPP Holdings Berhad has been paying dividends for three years, suggesting that management would be happy to continue paying dividends, despite declining earnings. According to existing analyst forecasts, the company's future dividend payout ratio is expected to drop to 48% in the next three years. As a result, the expected decline in HPP Holdings Berhad's dividend payout ratio explains that the company's future ROE is expected to rise to 16% over the same period.
conclusion
All in all, you should think twice before deciding on any investment action regarding HPP Holdings Berhad. The company's profit growth rate was disappointing, as ROE was low and there was not much reinvestment in the business. Having said that, we researched the latest analyst forecasts and found that while the company has seen its earnings shrink in the past, analysts expect its future earnings to grow. Are these analyst forecasts based on broader expectations for the industry, or are they based on the company's fundamentals? Click here to be taken to our analyst forecasts page for the company .
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This article by Simply Wall St is general in nature. We provide commentary using only unbiased methodologies, based on historical data and analyst forecasts, 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.
