With the stock down 11% over the past month, Powerwell Holdings ( KLSE:PWRWELL ) is easy to ignore. We decided to study the company’s financials to see if the downward trend would continue, as the company’s long-term performance usually reflects the market’s results. Specifically, today we focus on Powerwell Holdings Berhad’s ROE.
ROE, or return on equity, is a useful tool for evaluating how effectively a company is generating a return on its investment from shareholders. In short, ROE shows the return each dollar generates relative to shareholders’ investments.
Check out our latest analysis of Powerwell Holdings Berhad
How do you calculate return on equity?
of Formula for ROE is it –
Return on equity = net profit (from continuing operations) ÷ stockholders’ equity
Therefore, according to the above formula, the ROE for Powerwell Holdings Berhad is:
8.8% = RM6.9m ÷ RM78m (based on twelve months to June 2023).
‘Return’ is the profit made in the last twelve months. Therefore, this means that for every MYR1 of shareholder’s investments, the company earns MYR0.09 in profit.
What does ROE have to do with earnings growth?
We have already established that ROE serves as a measure of a company’s future earnings and profitability. Now we need to assess how much profit the company will invest or “retain” for future growth, which will give us an idea of the company’s growth potential. In general, other things being equal, firms with high returns on equity and retained earnings have higher growth rates than firms that do not share these characteristics.
Powerwell Holdings Berhad’s revenue growth and 8.8% ROE
On the face of it, Powerwell Holdings Berhad’s ROE is not much to talk about. However, a closer look reveals that the company’s ROE is similar to the industry average of 8.4%. But again, Powerwell Holdings Berhad’s five-year net income is down 11 percent. Note, the company has a slightly lower ROE. So, this goes some way in explaining declining earnings.
So, in the next step, comparing Powerwell Holdings Berhad to the industry, we are disappointed to find that the industry has been growing by 13% over the past few years while the company has been shrinking its earnings.
The basis for attaching value to the company is highly correlated with revenue growth. Investors must next decide whether the expected earnings growth or lack thereof is built into the stock price. Doing so will help them determine 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 earnings expectations. Therefore, you may want to check whether Powerwell Holdings Berhad is trading at a high P/E or a low P/E relative to the industry.
Is Powerwell Holdings using its earnings effectively?
Powerwell Holdings Berhad’s highest three-year average payout ratio is 51% (which equates to a 49% dividend yield). This shows that the company is paying most of its profits to shareholders in the form of dividends. This goes some way to explaining why the income has been declining. With little left to reinvest into the business, earnings growth is far from over. Visit the Risk Dashboard for free to learn about the 4 risks we have identified for Powerwell Holdings Berhad.
Overall, we are extremely cautious before making any decisions on Powerwell Holdings Berhad. The company saw a lack of earnings by retaining very little profit and reinvesting whatever little it retained at a very low rate of return. We have done a brief research on the company’s growth data so far. For more insights into Powerwell Holdings Berhad’s past earnings growth, take a look at our historical earnings, revenue and cash flow visualization.
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