Hong Leong Industries Berhad's (KLSE:HLIND) Has Had A Decent Run On The Stock market: Are Fundamentals In The Driver's Seat?
Hong Leong Industries Berhad's (KLSE:HLIND) stock is up by 5.8% over the past three months. As most would know, long-term fundamentals have a strong correlation with market price movements, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. Particularly, we will be paying attention to Hong Leong Industries Berhad's ROE today.
ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
See our latest analysis for Hong Leong Industries Berhad
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 Hong Leong Industries Berhad is:
20% = RM477m ÷ RM2.3b (Based on the trailing twelve months to March 2024).
The 'return' is the income the business earned over the last year. So, this means that for every MYR1 of its shareholder's investments, the company generates a profit of MYR0.20.
What Is The Relationship Between ROE And Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. 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. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.
A Side By Side comparison of Hong Leong Industries Berhad's Earnings Growth And 20% ROE
At first glance, Hong Leong Industries Berhad seems to have a decent ROE. Especially when compared to the industry average of 7.9% the company's ROE looks pretty impressive. Given the circumstances, we can't help but wonder why Hong Leong Industries Berhad saw little to no growth in the past five years. Based on this, we feel that there might be other reasons which haven't been discussed so far in this article that could be hampering the company's growth. Such as, the company pays out a huge portion of its earnings as dividends, or is faced with competitive pressures.
We then compared Hong Leong Industries 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 6.8% 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). This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Hong Leong Industries Berhad's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Hong Leong Industries Berhad Using Its Retained Earnings Effectively?
The high three-year median payout ratio of 61% (meaning, the company retains only 39% of profits) for Hong Leong Industries Berhad suggests that the company's earnings growth was miniscule as a result of paying out a majority of its earnings.
Additionally, Hong Leong Industries Berhad has paid dividends over a period of at least ten years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth.
Conclusion
In total, it does look like Hong Leong Industries Berhad has some positive aspects to its business. Although, we are disappointed to see a lack of growth in earnings even in spite of a high ROE. Bear in mind, the company reinvests a small portion of its profits, which means that investors aren't reaping the benefits of the high rate of return. With that said, on studying the latest analyst forecasts, we found that while the company has seen growth in its past earnings, analysts expect its future earnings to decline, albeit marginally. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com