DKSH Holdings (Malaysia) Berhad's (KLSE:DKSH) Stock Been Rising: Are Strong Financials Guiding The Market?

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

How Is ROE Calculated?

ROE can be calculated by using the formula:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for DKSH Holdings (Malaysia) Berhad is:

12% = RM104m ÷ RM859m (Based on the trailing twelve months to September 2023).

The 'return' is the profit over the last twelve months. So, this means that for every MYR1 of its shareholder's investments, the company generates a profit of MYR0.12.

What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.

DKSH Holdings (Malaysia) Berhad's Earnings Growth And 12% ROE

To begin with, DKSH Holdings (Malaysia) Berhad seems to have a respectable ROE. On comparing with the average industry ROE of 5.3% the company's ROE looks pretty remarkable. This certainly adds some context to DKSH Holdings (Malaysia) Berhad's exceptional 25% net income growth seen over the past five years. We reckon that there could also be other factors at play here. Such as - high earnings retention or an efficient management in place.

Next, on comparing with the industry net income growth, we found that DKSH Holdings (Malaysia) Berhad's growth is quite high when compared to the industry average growth of 17% in the same period, which is great to see.

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about DKSH Holdings (Malaysia) Berhad's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is DKSH Holdings (Malaysia) Berhad Using Its Retained Earnings Effectively?

DKSH Holdings (Malaysia) Berhad's ' three-year median payout ratio is on the lower side at 21% implying that it is retaining a higher percentage (79%) of its profits. So it looks like DKSH Holdings (Malaysia) Berhad is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Moreover, DKSH Holdings (Malaysia) Berhad is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 21% of its profits over the next three years. Accordingly, forecasts suggest that DKSH Holdings (Malaysia) Berhad's future ROE will be 11% which is again, similar to the current ROE.

Summary

On the whole, we feel that DKSH Holdings (Malaysia) Berhad's performance has been quite good. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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