Shin Yang Group Berhad (KLSE:SYGROUP) has had a great run on the stock market, with its shares up a whopping 53% over the past three months. Given the company’s impressive performance, we decided to take a closer look at its financial indicators, as the financial health of a company in the long run usually determines market results. In particular, we will be paying attention to Shin Yang Group Berhad’s return on equity today.

Return on equity, or ROE, is an important factor for a shareholder to consider as it tells them how effectively their capital is being reinvested. Simply put, it is used to assess the profitability of a company relative to its equity.

Check out our latest analysis for Shin Yang Group Berhad

How do you calculate return on equity?

ROE can be calculated using the following formula:

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

Based on the above formula, the ROE for Shin Yang Group Berhad is:

10% = RM131 million ÷ RM1.3 billion (based on the last twelve months to March 2024).

The “return” is the income the company earned over the last year. This means that for every MYR of equity, the company earned MYR0.10 in profit.

Why is return on equity (ROE) important for earnings growth?

We have already established that return on equity (ROE) serves as an efficient measure of a company’s future earnings. Now we need to evaluate how much profit the company reinvests or “retains” for future growth, which gives us an idea of ​​the company’s growth potential. Assuming everything else remains unchanged, companies that have both a higher return on equity and higher earnings retention are usually those that have a higher growth rate compared to companies that do not have the same characteristics.

Earnings growth and 10% ROE of Shin Yang Group Berhad

At first glance, Shin Yang Group Berhad’s return on equity doesn’t look very promising. However, a closer look shows that the company’s return on equity is higher than the industry average of 6.4%, which is something we certainly can’t ignore. Especially when you consider Shin Yang Group Berhad’s exceptional net profit growth of 64% over the past five years. Keep in mind that the company has a moderately low return on equity. It’s just that the industry’s return on equity is lower. So there could well be other reasons for the earnings growth. For example, high retained earnings or the company being in a high-growth industry.

We then compared Shin Yang Group Berhad’s net profit growth with that of the industry and are pleased to see that the company’s growth rate is higher than that of the industry, which experienced a growth rate of 22% over the same 5-year period.

The story continues

The basis for valuing a company depends greatly on its earnings growth. The investor should try to determine if the expected earnings growth or expected earnings decline, whichever may be the case, is built into the price. This will then help them determine if the stock is positioned for a good or bad future. 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 prospects. So, you should check whether Shin Yang Group Berhad is trading at a high or low P/E relative to its industry.

Does Shin Yang Group Berhad use its retained earnings effectively?

Shin Yang Group Berhad’s three-year median payout ratio to shareholders is 15%, which is quite low. This means that the company retains 85% of its profits. So it looks like Shin Yang Group Berhad is heavily reinvesting its profits to grow its business, which is reflected in its earnings growth.

Although Shin Yang Group Berhad has been able to increase its profits, the company only recently started paying dividends. This probably means that the company has decided to impress new and existing shareholders with a dividend.

Diploma

Overall, we are quite pleased with Shin Yang Group Berhad’s performance. We particularly like that the company reinvests heavily in its business while maintaining a moderate rate of return. Unsurprisingly, this has resulted in impressive earnings growth. If the company continues to grow earnings at this rate, this could have a positive impact on the share price, considering how earnings per share influences long-term share prices. Let’s not forget that business risk is also one of the factors that influence the share price, so this is also an important area that investors need to pay attention to before making a decision about a company. Our risk dashboard includes the 2 risks we have identified for Shin Yang Group Berhad.

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This Simply Wall St article is of a general nature. We comment solely on the basis of historical data and analyst forecasts, using an unbiased methodology. Our articles do not constitute financial advice. It is not a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative materials. Simply Wall St does not hold any of the stocks mentioned.