Spring Art Holdings Berhad (KLSE: SPRING) has had a strong run in the equity market with its shares rising significantly by 33% over the past week. However, we have decided to pay attention to the fundamentals of the company which do not seem to give a clear sign on the financial health of the company. In this article, we have decided to focus on the ROE of Spring Art Holdings Berhad.
ROE or return on equity is a useful tool to assess how effectively a company can generate the returns on investment it has received from its shareholders. In simpler terms, it measures a company’s profitability relative to equity.
See our latest review for Spring Art Holdings Berhad
How do you calculate return on equity?
the formula for ROE is:
Return on equity = Net income (from continuing operations) ÷ Equity
Thus, based on the above formula, the ROE of Spring Art Holdings Berhad is:
2.9% = RM 2.1 million ÷ RM 73 million (based on the last twelve months to September 2021).
The “return” is the income the business has earned over the past year. This means that for every MYR 1 value of equity, the company generated MYR 0.03 in profit.
Why is ROE important for profit growth?
We have already established that ROE is an effective indicator of profit generation for a company’s future profits. Based on how much of those profits the company reinvests or “withholds” and its efficiency, we are then able to assess a company’s profit growth potential. Assuming everything 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 than companies that do not have the same characteristics.
Spring Art Holdings Berhad profit growth and 2.9% ROE
It is quite clear that the ROE of Spring Art Holdings Berhad is rather low. Even compared to the industry’s average ROE of 8.5%, the company’s ROE is pretty dismal. Therefore, it might not be wrong to say that the 11% drop in five-year net income observed by Spring Art Holdings Berhad may have been the result of lower ROE. We believe there could be other factors at play here as well. For example, the company has misallocated capital or the company has a very high payout rate.
So, in the next step, we compared the performance of Spring Art Holdings Berhad to that of the industry and were disappointed to find that although the company reduced its profits, the industry increased its profits at a rate of. 0.1% over the same period.
The basis for attaching value to a business is, to a large extent, related to the growth of its profits. It is important for an investor to know whether the market has factored in the expected growth (or decline) in company earnings. This will help them determine whether the future of the stock looks bright or threatening. Spring Art Holdings Berhad is valued enough compared to other companies? These 3 evaluation measures could help you decide.
Spring Art Holdings Is Berhad Efficiently Using Retained Earnings?
Despite a normal three-year median payout ratio of 26% (where it retains 74% of its profits), Spring Art Holdings Berhad experienced a decline in its profits as we saw above. So there could be other explanations in this regard. For example, the business of the company can deteriorate.
It was only recently that Spring Art Holdings Berhad declared paying a dividend. This probably means that management might have concluded that its shareholders have a strong preference for dividends.
Overall, we believe that the performance presented by Spring Art Holdings Berhad can be open to many interpretations. Even though it appears to be keeping most of its earnings, given the low ROE, investors might not benefit from all of this reinvestment after all. The weak earnings growth suggests that our theory is correct. In conclusion, we would proceed with caution with this company and one way to do it would be to look at the risk profile of the company. You can see the 5 risks we have identified for Spring Art Holdings Berhad by visiting our risk dashboard for free on our platform here.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only 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 into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative material. Simply Wall St has no position in any of the stocks mentioned.