Nova Wellness Group Berhad's (KLSE:NOVA) Stock Has Been Sliding But Fundamentals Look Strong: Is The Market Wrong?

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It is hard to get excited after looking at Nova Wellness Group Berhad’s (KLSE:NOVA) recent performance, when its stock has declined 3.2% over the past month. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. In this article, we decided to focus on Nova Wellness Group Berhad’s 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. Put another way, it reveals the company’s success at turning shareholder investments into profits.

See our latest analysis for Nova Wellness Group Berhad

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 Nova Wellness Group Berhad is:

14% = RM15m ÷ RM105m (Based on the trailing twelve months to September 2022).

The ‘return’ is the yearly profit. One way to conceptualize this is that for each MYR1 of shareholders’ capital it has, the company made MYR0.14 in profit.

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. Depending on how much of these profits the company reinvests or “retains”, and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.

A Side By Side comparison of Nova Wellness Group Berhad’s Earnings Growth And 14% ROE

To begin with, Nova Wellness Group Berhad seems to have a respectable ROE. Further, the company’s ROE compares quite favorably to the industry average of 9.8%. This probably laid the ground for Nova Wellness Group Berhad’s moderate 14% net income growth seen over the past five years.

We then compared Nova Wellness Group Berhad’s net income growth with the industry and we’re pleased to see that the company’s growth figure is higher when compared with the industry which has a growth rate of 2.5% in the same period.

past-earnings-growthpast-earnings-growth

past-earnings-growth

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you’re wondering about Nova Wellness Group Berhad’s’s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Nova Wellness Group Berhad Making Efficient Use Of Its Profits?

Nova Wellness Group Berhad has a three-year median payout ratio of 34%, which implies that it retains the remaining 66% of its profits. This suggests that its dividend is well covered, and given the decent growth seen by the company, it looks like management is reinvesting its earnings efficiently.

Moreover, Nova Wellness Group Berhad is determined to keep sharing its profits with shareholders which we infer from its long history of four years of paying a dividend. Based on the latest analysts’ estimates, we found that the company’s future payout ratio over the next three years is expected to hold steady at 34%. Still, forecasts suggest that Nova Wellness Group Berhad’s future ROE will rise to 19% even though the the company’s payout ratio is not expected to change by much.

Summary

In total, we are pretty happy with Nova Wellness Group Berhad’s performance. 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. On studying current analyst estimates, we found that analysts expect the company to continue its recent growth streak. To know more about the company’s future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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

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.

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