2 days ago
Hap Seng Consolidated Berhad's (KLSE:HAPSENG) Dismal Stock Performance Reflects Weak Fundamentals
Hap Seng Consolidated Berhad (KLSE:HAPSENG) has had a rough three months with its share price down 15%. Given that stock prices are usually driven by a company's fundamentals over the long term, which in this case look pretty weak, we decided to study the company's key financial indicators. In this article, we decided to focus on Hap Seng Consolidated Berhad's ROE.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors' money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
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The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Hap Seng Consolidated Berhad is:
7.7% = RM733m ÷ RM9.5b (Based on the trailing twelve months to March 2025).
The 'return' is the yearly profit. Another way to think of that is that for every MYR1 worth of equity, the company was able to earn MYR0.08 in profit.
View our latest analysis for Hap Seng Consolidated Berhad
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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. 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.
On the face of it, Hap Seng Consolidated Berhad's ROE is not much to talk about. However, given that the company's ROE is similar to the average industry ROE of 8.2%, we may spare it some thought. But Hap Seng Consolidated Berhad saw a five year net income decline of 8.4% over the past five years. Remember, the company's ROE is a bit low to begin with. Therefore, the decline in earnings could also be the result of this.
That being said, we compared Hap Seng Consolidated Berhad's performance with the industry and were concerned when we found that while the company has shrunk its earnings, the industry has grown its earnings at a rate of 18% in the same 5-year period.
Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Hap Seng Consolidated Berhad's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
With a high three-year median payout ratio of 79% (implying that 21% of the profits are retained), most of Hap Seng Consolidated Berhad's profits are being paid to shareholders, which explains the company's shrinking earnings. The business is only left with a small pool of capital to reinvest - A vicious cycle that doesn't benefit the company in the long-run. To know the 2 risks we have identified for Hap Seng Consolidated Berhad visit our risks dashboard for free.
Additionally, Hap Seng Consolidated Berhad has paid dividends over a period of at least ten years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth.
In total, we would have a hard think before deciding on any investment action concerning Hap Seng Consolidated Berhad. The company has seen a lack of earnings growth as a result of retaining very little profits and whatever little it does retain, is being reinvested at a very low rate of return. So far, we've only made a quick discussion around the company's earnings growth. So it may be worth checking this free detailed graph of Hap Seng Consolidated Berhad's past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) 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.
