Samchem Holdings Berhad’s (KLSE:SAMCHEM) stock is up by a considerable 30% over the past three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. In this article, we decided to focus on Samchem Holdings Berhad’s ROE.
Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. Put another way, it reveals the company’s success at turning shareholder investments into profits.
How Do You 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 Samchem Holdings Berhad is:
32% = RM84m ÷ RM262m (Based on the trailing twelve months to September 2021).
The ‘return’ is the amount earned after tax 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 MYR0.32 in profit.
What Has ROE Got To Do With 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.
Samchem Holdings Berhad’s Earnings Growth And 32% ROE
Firstly, we acknowledge that Samchem Holdings Berhad has a significantly high ROE. Secondly, even when compared to the industry average of 7.3% the company’s ROE is quite impressive. Under the circumstances, Samchem Holdings Berhad’s considerable five year net income growth of 30% was to be expected.
Given that the industry shrunk its earnings at a rate of 3.2% in the same period, the net income growth of the company is quite impressive.
Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Samchem Holdings Berhad fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is Samchem Holdings Berhad Using Its Retained Earnings Effectively?
The three-year median payout ratio for Samchem Holdings Berhad is 40%, which is moderately low. The company is retaining the remaining 60%. So it seems that Samchem Holdings Berhad is reinvesting efficiently in a way that it sees impressive growth in its earnings (discussed above) and pays a dividend that’s well covered.
Additionally, Samchem Holdings Berhad has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders.
Overall, we are quite pleased with Samchem Holdings Berhad’s performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Not to forget, share price outcomes are also dependent on the potential risks a company may face. So it is important for investors to be aware of the risks involved in the business. You can see the 3 risks we have identified for Samchem Holdings Berhad by visiting our risks dashboard for free on our platform here.
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.
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