With its stock down 7.4% over the past month, it is easy to disregard Harn Len Corporation Bhd (KLSE:HARNLEN). However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. Specifically, we decided to study Harn Len Corporation Bhd's ROE in this article.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.
See our latest analysis for Harn Len Corporation Bhd
How To 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:
4.1% = RM13m ÷ RM312m (Based on the trailing twelve months to December 2022).
The 'return' refers to a company's earnings over the last year. That means that for every MYR1 worth of shareholders' equity, the company generated MYR0.04 in profit.
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. 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.
Harn Len Corporation Bhd's Earnings Growth And 4.1% ROE
It is hard to argue that Harn Len Corporation Bhd's ROE is much good in and of itself. Even when compared to the industry average of 9.5%, the ROE figure is pretty disappointing. Despite this, surprisingly, Harn Len Corporation Bhd saw an exceptional 21% net income growth over the past five years. Therefore, there could be other reasons behind this growth. Such as - high earnings retention or an efficient management in place.
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 18% in the same period.
Earnings growth is an important metric to consider when valuing a stock. 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. Is Harn Len Corporation Bhd fairly valued compared to other companies? These 3 valuation measures might help you decide.