Are Yenher Holdings Berhad's (KLSE:YENHER) Mixed Financials The Reason For Its Gloomy Performance on The Stock Market?
Simply Wall St
4 min read
It is hard to get excited after looking at Yenher Holdings Berhad's (KLSE:YENHER) recent performance, when its stock has declined 11% over the past month. We, however decided to study the company's financials to determine if they have got anything to do with the price decline. Stock prices are usually driven by a company’s financial performance over the long term, and therefore we decided to pay more attention to the company's financial performance. Particularly, we will be paying attention to Yenher Holdings Berhad's ROE today.
Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Yenher Holdings Berhad is:
10% = RM22m ÷ RM215m (Based on the trailing twelve months to December 2022).
The 'return' is the profit over the last twelve months. One way to conceptualize this is that for each MYR1 of shareholders' capital it has, the company made MYR0.10 in profit.
What Is The Relationship Between ROE And Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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 all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.
Yenher Holdings Berhad's Earnings Growth And 10% ROE
At first glance, Yenher Holdings Berhad's ROE doesn't look very promising. Yet, a closer study shows that the company's ROE is similar to the industry average of 9.9%. Having said that, Yenher Holdings Berhad's net income growth over the past five years is more or less flat. Remember, the company's ROE is not particularly great to begin with. Hence, this provides some context to the flat earnings growth seen by the company.
We then compared Yenher Holdings Berhad's net income growth with the industry and found that the average industry growth rate was 18% in the same period.
KLSE:YENHER Past Earnings Growth May 15th 2023
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. 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 Yenher Holdings Berhad is trading on a high P/E or a low P/E, relative to its industry.
Is Yenher Holdings Berhad Using Its Retained Earnings Effectively?
Despite having a normal three-year median payout ratio of 41% (implying that the company keeps 59% of its income) over the last three years, Yenher Holdings Berhad has seen a negligible amount of growth in earnings as we saw above. So there could be some other explanation in that regard. For instance, the company's business may be deteriorating.
Only recently, Yenher Holdings Berhad started paying a dividend. This means that the management might have concluded that its shareholders prefer dividends over earnings growth.
Conclusion
On the whole, we feel that the performance shown by Yenher Holdings Berhad can be open to many interpretations. Even though it appears to be retaining most of its profits, given the low ROE, investors may not be benefitting from all that reinvestment after all. The low earnings growth suggests our theory correct. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. To gain further insights into Yenher Holdings Berhad's past profit growth, check out this visualization of past earnings, revenue and cash flows.
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.
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