Explore Shriro Holdings's Fair Values from the Community and select yours

Most readers would already know that Shriro Holdings' (ASX:SHM) stock increased by 2.3% over the past month. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to investigate if the company's decent financials had a hand to play in the recent price move. In this article, we decided to focus on Shriro Holdings' ROE.

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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

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Return on equity 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 Shriro Holdings is:

14% = AU$7.2m ÷ AU$53m (Based on the trailing twelve months to December 2024).

The 'return' refers to a company's earnings over the last year. So, this means that for every A$1 of its shareholder's investments, the company generates a profit of A$0.14.

View our latest analysis for Shriro Holdings

So far, we've learned that ROE is a measure of a company's profitability. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

To begin with, Shriro Holdings seems to have a respectable ROE. Even when compared to the industry average of 14% the company's ROE looks quite decent. However, while Shriro Holdings has a pretty respectable ROE, its five year net income decline rate was 8.3% . We reckon that there could be some other factors at play here that are preventing the company's growth. Such as, the company pays out a huge portion of its earnings as dividends, or is faced with competitive pressures.

From the 8.3% decline reported by the industry in the same period, we infer that Shriro Holdings and its industry are both shrinking at a similar rate.