Most readers would already be aware that Kumpulan H & L High-Tech Berhad's (KLSE:HIGHTEC) stock increased significantly by 11% over the past month. As most would know, fundamentals are what usually guide market price movements over the long-term, 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 Kumpulan H & L High-Tech Berhad's ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for Kumpulan H & L High-Tech Berhad

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 Kumpulan H & L High-Tech Berhad is:

6.0% = RM7.8m ÷ RM131m (Based on the trailing twelve months to July 2023).

The 'return' is the yearly profit. That means that for every MYR1 worth of shareholders' equity, the company generated MYR0.06 in profit.

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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.

A Side By Side comparison of Kumpulan H & L High-Tech Berhad's Earnings Growth And 6.0% ROE

On the face of it, Kumpulan H & L High-Tech Berhad's ROE is not much to talk about. We then compared the company's ROE to the broader industry and were disappointed to see that the ROE is lower than the industry average of 7.9%. In spite of this, Kumpulan H & L High-Tech Berhad was able to grow its net income considerably, at a rate of 28% in the last five years. We reckon that there could be other factors at play here. For instance, the company has a low payout ratio or is being managed efficiently.

Next, on comparing with the industry net income growth, we found that Kumpulan H & L High-Tech Berhad's growth is quite high when compared to the industry average growth of 12% in the same period, which is great to see.

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). Doing so will help them establish if the stock's future looks promising or ominous. 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 Kumpulan H & L High-Tech Berhad is trading on a high P/E or a low P/E, relative to its industry.

Is Kumpulan H & L High-Tech Berhad Efficiently Re-investing Its Profits?

Kumpulan H & L High-Tech Berhad has a three-year median payout ratio of 35% (where it is retaining 65% of its income) which is not too low or not too high. By the looks of it, the dividend is well covered and Kumpulan H & L High-Tech Berhad is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Besides, Kumpulan H & L High-Tech Berhad has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders.

Conclusion

In total, it does look like Kumpulan H & L High-Tech Berhad has some positive aspects to its business. Despite its low rate of return, the fact that the company reinvests a very high portion of its profits into its business, no doubt contributed to its high earnings growth. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. Our risks dashboard would have the 3 risks we have identified for Kumpulan H & L High-Tech Berhad.

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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.