Is Harvey Norman Holdings' Stock Overpriced Amid Rising Earnings?

Harvey Norman Holdings' (ASX:HVN) stock has risen 11% over the past three months, but its financial prospects look weak. The company's return on equity (ROE) is 9.3%, similar to the industry average, but its net income has shrunk by 7.3% over the past five years, while the industry has grown by 7.2%. This suggests that the company's low ROE may be causing earnings growth to decline.

Title: Harvey Norman Holdings' Stock Rise Despite Weak Financial Prospects

Harvey Norman Holdings' (ASX: HVN) stock has risen by 11% over the past three months, drawing attention to the company's recent performance. However, a closer look at the company's financial indicators reveals a more complex picture. Despite the stock's upward trend, Harvey Norman Holdings' return on equity (ROE) and earnings growth paint a concerning picture.

Return on Equity (ROE)

ROE, a key profitability ratio, measures the rate of return on the capital provided by shareholders. For Harvey Norman Holdings, the ROE is 9.3%, calculated as:
\[ \text{ROE} = \frac{\text{Net Profit}}{\text{Shareholders' Equity}} = \frac{\text{AU}\$438\text{m}}{\text{AU}\$4.7\text{b}} \]

This figure is similar to the industry average of 8.8%, but it is not particularly impressive. A higher ROE indicates better profitability, and while Harvey Norman Holdings' ROE is on par with the industry, it does not suggest exceptional performance.

Earnings Growth

Over the past five years, Harvey Norman Holdings' net income has shrunk by 7.3%, a significant decline compared to the industry's growth rate of 7.2%. This indicates that while the industry as a whole has been growing, Harvey Norman Holdings has been struggling to maintain its earnings.

Sector Valuation

The Australian Consumer Discretionary sector has seen its valuation change over the past few years. As of July 2025, the sector's market capitalization is AU$241.7 billion, with a PE ratio of 59.6x and a PS ratio of 1.9x. These ratios suggest that investors are optimistic about the sector's long-term growth prospects, but the industry's current PE ratio is higher than its 3-year average, indicating a potential overvaluation.

Conclusion

While Harvey Norman Holdings' stock has shown a notable increase in value over the past three months, its financial health is concerning. The company's ROE, while similar to the industry average, does not indicate strong profitability. Moreover, the significant decline in net income over the past five years suggests that the company is facing challenges in generating earnings growth. Investors should carefully consider these factors when evaluating Harvey Norman Holdings' stock.

References
[1] https://ca.finance.yahoo.com/news/harvey-norman-holdings-limiteds-asx-220216867.html
[2] https://www.stocktitan.net/news/CMSG/
[3] https://simplywall.st/markets/au/consumer-discretionary