Harn Len Corporation Bhd (KLSE:HARNLEN) has had a rough month with its share price down 7.2%. But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. Specifically, we decided to study Harn Len Corporation Bhd's ROE in this article.

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. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

Check out our latest analysis for Harn Len Corporation Bhd

How Do You Calculate Return On Equity?

The formula for return on equity is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Harn Len Corporation Bhd is:

0.6% = RM1.9m ÷ RM303m (Based on the trailing twelve months to May 2023).

The 'return' is the profit over the last twelve months. So, this means that for every MYR1 of its shareholder's investments, the company generates a profit of MYR0.01.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.

Harn Len Corporation Bhd's Earnings Growth And 0.6% ROE

As you can see, Harn Len Corporation Bhd's ROE looks pretty weak. Not just that, even compared to the industry average of 9.1%, the company's ROE is entirely unremarkable. Despite this, surprisingly, Harn Len Corporation Bhd saw an exceptional 23% net income growth over the past five years. We believe that there might be other aspects that are positively influencing the company's earnings growth. For instance, the company has a low payout ratio or is being managed efficiently.

Next, on comparing Harn Len Corporation Bhd's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 22% over the last few years.

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Harn Len Corporation Bhd is trading on a high P/E or a low P/E, relative to its industry.