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Are strong financials driving the recent rally in ARK Resources Holdings Berhad (KLSE:ARK) shares?
Most readers will already know that ARK Resources Holdings Berhad (KLSE:ARK) shares have increased significantly by 78% in the last three months. Since the market typically pays for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. In particular, we will be attentive ARK Resources Holdings Berhad’s ROE today.
ROE or return on equity is a useful tool for evaluating how effectively a company can generate returns on the investment it has received from its shareholders. Simply put, it is used to evaluate the profitability of a company in relation to its share capital.
See our latest analysis for ARK Resources Holdings Berhad
How to calculate return on equity?
ROE can be calculated using the formula:
Return on Equity = Net Profit (from continuing operations) ÷ Equity
Therefore, based on the above formula, ARK Resources Holdings Berhad’s ROE is:
11% = RM1.6 million ÷ RM15 million (Based on trailing twelve months to December 2023).
The ‘return’ is the amount earned after tax over the last twelve months. One way to conceptualize this is that for every MYR1 of share capital it has, the company made MYR0.11 in profit.
What is the relationship between ROE and earnings growth?
So far, we’ve 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 can then assess a company’s future ability to generate profits. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher a company’s growth rate compared to companies that don’t necessarily exhibit these characteristics.
A side-by-side comparison of ARK Resources Holdings Berhad’s earnings growth and 11% ROE
At first glance, ARK Resources Holdings Berhad’s ROE isn’t very noteworthy. Although a more detailed study shows that the company’s ROE is higher than the industry average of 6.5%, which we definitely cannot ignore. Even more so after seeing ARK Resources Holdings Berhad’s exceptional 31% net profit growth over the last five years. That said, for starters, the company has a slightly low ROE, just above the industry average. So there may well be other reasons for the earnings growth. Such as: high profit retention or company belonging to a high-growth sector.
Next, when comparing with the industry’s net profit growth, we find that ARK Resources Holdings Berhad’s growth is quite high when compared to the industry average growth of 7.1% over the same period, which is great to see.
The story continues
past profit growth
Earnings growth is an important factor in stock valuation. The investor should attempt to establish whether the expected growth or decline in earnings, whatever the case may be, is priced in. This will help you determine whether the stock’s future looks promising or ominous. If you are wondering about ARK Resources Holdings Berhad’s valuation, check out this indicator of your price/earnings ratiocompared to your industry.
Is ARK Resources Holdings Berhad making efficient use of its profits?
Given that ARK Resources Holdings Berhad does not pay any regular dividends to its shareholders, we infer that the company has been reinvesting all of its profits to grow its business.
Conclusion
Overall, we feel that ARK Resources Holdings Berhad’s performance has been quite good. In particular, it’s great to see that the company has seen significant growth in its profits, supported by a respectable ROE and a high rate of reinvestment. If the company continues to grow its profits the way it has, this could have a positive impact on its share price, given how earnings per share influence share prices over the long term. Let’s not forget that business risk is also one of the factors that affects share prices. Therefore, this is also an important area that investors need to pay attention to before making a decision on any business. To learn about the 2 risks we identified for ARK Resources Holdings Berhad visit our risk panel for free.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only 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 into account your objectives or financial situation. Our goal is to bring you long-term focused analysis driven by fundamental data. Please note that our analysis may not take into account the latest price-sensitive company announcements or qualitative materials. Simply Wall St has no position in any of the stocks mentioned.