Smile-Link Healthcare Global Berhad (KLSE:SMILE) Is Going Strong But Fundamentals Appear To Be Mixed : Is There A Clear Direction For The Stock?

Smile-Link Healthcare Global Berhad (KLSE:SMILE) has had a great run on the share market with its stock up by a significant 11% over the last week. However, we wonder if the company’s inconsistent financials would have any adverse impact on the current share price momentum. Specifically, we decided to study Smile-Link Healthcare Global Berhad’s ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company’s shareholders.

See our latest analysis for Smile-Link Healthcare Global Berhad

How Do You Calculate Return On Equity?

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 Smile-Link Healthcare Global Berhad is:

3.1% = RM1.0m ÷ RM33m (Based on the trailing twelve months to December 2022).

The ‘return’ is the income the business earned over the last year. That means that for every MYR1 worth of shareholders’ equity, the company generated MYR0.03 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.

Smile-Link Healthcare Global Berhad’s Earnings Growth And 3.1% ROE

It is hard to argue that Smile-Link Healthcare Global Berhad’s ROE is much good in and of itself. Not just that, even compared to the industry average of 13%, the company’s ROE is entirely unremarkable. Given the circumstances, the significant decline in net income by 61% seen by Smile-Link Healthcare Global Berhad over the last five years is not surprising. We reckon that there could also be other factors at play here. For instance, the company has a very high payout ratio, or is faced with competitive pressures.

That being said, we compared Smile-Link Healthcare Global 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 32% 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). 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 Smile-Link Healthcare Global Berhad is trading on a high P/E or a low P/E, relative to its industry.

Is Smile-Link Healthcare Global Berhad Using Its Retained Earnings Effectively?

Looking at its three-year median payout ratio of 36% (or a retention ratio of 64%) which is pretty normal, Smile-Link Healthcare Global Berhad’s declining earnings is rather baffling as one would expect to see a fair bit of growth when a company is retaining a good portion of its profits. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.

Additionally, Smile-Link Healthcare Global Berhad has paid dividends over a period of four years, which means that the company’s management is rather focused on keeping up its dividend payments, regardless of the shrinking earnings.

Conclusion

In total, we’re a bit ambivalent about Smile-Link Healthcare Global Berhad’s performance. While the company does have a high rate of profit retention, its low rate of return is probably hampering its earnings growth. Wrapping up, we would proceed with caution with this company and one way of doing that would be to look at the risk profile of the business. Our risks dashboard would have the 3 risks we have identified for Smile-Link Healthcare Global Berhad.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using 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 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.