Beshom Holdings Berhad (KLSE:BESHOM) has had a rough three months with its share price down 5.3%. To decide if this trend could continue, we decided to look at its weak fundamentals as they shape the long-term market trends. Specifically, we decided to study Beshom Holdings Berhad’s ROE in this article.
ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In simpler terms, it measures the profitability of a company in relation to shareholder’s equity.
View our latest analysis for Beshom Holdings Berhad
The formula for return on equity is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity
So, based on the above formula, the ROE for Beshom Holdings Berhad is:
3.2% = RM11m ÷ RM327m (Based on the trailing twelve months to July 2024).
The ‘return’ is the yearly profit. So, this means that for every MYR1 of its shareholder’s investments, the company generates a profit of MYR0.03.
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.
It is quite clear that Beshom Holdings Berhad’s ROE is rather low. Not just that, even compared to the industry average of 16%, the company’s ROE is entirely unremarkable. For this reason, Beshom Holdings Berhad’s five year net income decline of 25% is not surprising given its lower ROE. However, there could also be other factors causing the earnings to decline. For instance, the company has a very high payout ratio, or is faced with competitive pressures.
That being said, we compared Beshom Holdings 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 12% in the same 5-year period.
Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company’s expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is BESHOM fairly valued? This infographic on the company’s intrinsic value has everything you need to know.
