Advertisement
U.S. markets close in 3 hours 51 minutes
  • S&P 500

    5,252.33
    +3.84 (+0.07%)
     
  • Dow 30

    39,781.43
    +21.35 (+0.05%)
     
  • Nasdaq

    16,386.38
    -13.14 (-0.08%)
     
  • Russell 2000

    2,134.65
    +20.31 (+0.96%)
     
  • Crude Oil

    82.61
    +1.26 (+1.55%)
     
  • Gold

    2,236.40
    +23.70 (+1.07%)
     
  • Silver

    24.91
    +0.15 (+0.62%)
     
  • EUR/USD

    1.0798
    -0.0032 (-0.29%)
     
  • 10-Yr Bond

    4.1850
    -0.0110 (-0.26%)
     
  • GBP/USD

    1.2628
    -0.0010 (-0.08%)
     
  • USD/JPY

    151.3590
    +0.1130 (+0.07%)
     
  • Bitcoin USD

    70,904.38
    +1,687.50 (+2.44%)
     
  • CMC Crypto 200

    885.54
    0.00 (0.00%)
     
  • FTSE 100

    7,965.59
    +33.61 (+0.42%)
     
  • Nikkei 225

    40,168.07
    -594.66 (-1.46%)
     

Shriro Holdings Limited's (ASX:SHM) Stock Is Going Strong: Have Financials A Role To Play?

Most readers would already be aware that Shriro Holdings' (ASX:SHM) stock increased significantly by 39% over the past three months. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. In this article, we decided to focus on Shriro Holdings' ROE.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Check out our latest analysis for Shriro Holdings

How Is ROE Calculated?

The formula for ROE is:

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

So, based on the above formula, the ROE for Shriro Holdings is:

30% = AU$18m ÷ AU$61m (Based on the trailing twelve months to December 2020).

The 'return' is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each A$1 of shareholders' capital it has, the company made A$0.30 in profit.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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.

A Side By Side comparison of Shriro Holdings' Earnings Growth And 30% ROE

To begin with, Shriro Holdings has a pretty high ROE which is interesting. Secondly, even when compared to the industry average of 21% the company's ROE is quite impressive. Needless to say, we are quite surprised to see that Shriro Holdings' net income shrunk at a rate of 3.6% over the past five years. We reckon that there could be some other factors at play here that are preventing the company's growth. These include low earnings retention or poor allocation of capital.

That being said, we compared Shriro Holdings' 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 7.9% in the same period.

past-earnings-growth
past-earnings-growth

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish 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 its earnings prospects. So, you may want to check if Shriro Holdings is trading on a high P/E or a low P/E, relative to its industry.

Is Shriro Holdings Making Efficient Use Of Its Profits?

Shriro Holdings' declining earnings is not surprising given how the company is spending most of its profits in paying dividends, judging by its three-year median payout ratio of 79% (or a retention ratio of 21%). With only very little left to reinvest into the business, growth in earnings is far from likely. You can see the 5 risks we have identified for Shriro Holdings by visiting our risks dashboard for free on our platform here.

Additionally, Shriro Holdings has paid dividends over a period of five years, which means that the company's management is rather focused on keeping up its dividend payments, regardless of the shrinking earnings.

Summary

On the whole, we do feel that Shriro Holdings has some positive attributes. Yet, the low earnings growth is a bit concerning, especially given that the company has a high rate of return. Investors could have benefitted from the high ROE, had the company been reinvesting more of its earnings. As discussed earlier, the company is retaining a small portion of its profits. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. You can do your own research on Shriro Holdings and see how it has performed in the past by looking at this FREE detailed graph of past earnings, revenue and cash flows.

This article by Simply Wall St is general in nature. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

Advertisement