Is the market rewarding Spring Art Holdings Berhad (KLSE:SPRING) with negative sentiment due to its mixed fundamentals?

With its stock down 21% in the past three months, it’s easy to overlook Spring Art Holdings Berhad (KLSE:SPRING). It seems that the market has completely ignored the positive aspects of the company’s fundamentals and decided to weigh more on the negatives. Stock prices are usually determined by a company’s financial performance over the long term, and so we decided to pay more attention to the company’s financial performance. In this article, we decided to focus on the ROE of Spring Art Holdings Berhad.

Return on equity or ROE is an important factor for a shareholder to consider as it tells them how much of their capital is being reinvested. In other words, it is a profitability ratio that measures the rate of return on capital contributed by the company’s shareholders.

See our latest analysis for Spring Art Holdings Berhad

How to calculate return on equity?

The return on equity formula is:

Return on equity = Net income (from continuing operations) ÷ Equity

So, based on the above formula, the ROE for Spring Art Holdings Berhad is:

7.4% = RM5.8m ÷ RM79m (based on trailing twelve months to March 2022).

The “return” is the annual profit. This means that for every MYR1 of equity, the company generated MYR 0.07 of profit.

Why is ROE important for earnings growth?

So far, we have learned that ROE measures how efficiently a company generates its profits. Depending on how much of its profits the company chooses to reinvest or “keep”, we are then able to assess a company’s future ability to generate profits. Generally speaking, all things being equal, companies with high return on equity and earnings retention have a higher growth rate than companies that do not share these attributes.

A side-by-side comparison of Spring Art Holdings Berhad’s earnings growth and ROE of 7.4%

When you first look at it, Spring Art Holdings Berhad’s ROE doesn’t look so appealing. Yet further investigation shows that the company’s ROE is similar to the industry average of 7.4%. But again, Spring Art Holdings Berhad’s five-year net income declined by 11%. Keep in mind that the company has a slightly low ROE. Therefore, this partly explains the drop in income.

However, when we compared the growth of Spring Art Holdings Berhad with the industry, we found that although the company’s earnings declined, the industry experienced earnings growth of 3.9% during of the same period. It’s quite worrying.

KLSE: SPRING Past Earnings Growth July 15, 2022

Earnings growth is an important factor in stock valuation. The investor should try to establish whether the expected growth or decline in earnings, as the case may be, is taken into account. This will help him determine if the future of the stock looks bright or ominous. A 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 outlook. Thus, you might want to check whether Spring Art Holdings Berhad is trading on a high P/E or a low P/E, relative to its industry.

Is Spring Art Holdings Berhad Effectively Using Retained Earnings?

Although the company has paid a portion of its dividend in the past, it currently does not pay any dividend. This implies that potentially all of its profits are reinvested in the business.

Summary

Overall, we believe that the performance presented by Spring Art Holdings Berhad can be open to many interpretations. Even though it seems to keep most of its profits, given the low ROE, investors may not be benefiting from all that reinvestment after all. Weak earnings growth suggests that our theory is correct. In conclusion, we would proceed with caution with this business and one way to do that would be to review the risk profile of the business. To learn about the 3 risks we have identified for Spring Art Holdings Berhad, visit our risk dashboard for free.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.