CapitaLand Investment (SGX:9CI) stock is up 4.1% over the past week. We wonder if and what role the company’s financials play in this price move, as a company’s long-term fundamentals typically dictate market performance. Specifically, we decided to examine CapitaLand Investment’s ROE in this article.
Return on equity or ROE is an important factor for a shareholder to consider because it tells them how efficiently their capital is being reinvested. In short, ROE shows the profit generated by each dollar relative to the investment of its shareholders.
Check out our latest analysis on CapitaLand Investment
How do you calculate return on equity?
The formula for ROE is:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE for CapitaLand Investment is:
5.4% = S$1.0 billion ÷ S$19 billion (Based on trailing twelve months to June 2023).
“Return” is the amount earned after tax in the last twelve months. Another way to think about it is that for every SGD 1 worth of equity, the company was able to earn SGD 0.05 in profit.
Why is ROE important to earnings growth?
So far we have learned that ROE measures how efficiently a company generates its profits. Depending on how much of these earnings the company reinvests or “retains” and how effectively it does so, we are able to assess the company’s earnings growth potential. All else being equal, the higher the ROE and earnings retention, the higher the growth rate of a company compared to companies that do not necessarily have these characteristics.
CapitaLand Investment earnings growth and 5.4% ROE
At first glance, CapitaLand Investment’s ROE does not look very promising. However, the fact that the company’s ROE is higher than the industry average ROE of 4.0% is definitely interesting. Therefore, this probably set the stage for the decent 15% growth seen over the last five years by CapitaLand Investment. That being said, the company does have a somewhat low ROE to begin with, just higher than the industry average. Therefore, there may be some other aspects that cause the revenue to rise. For example, the company has a low payout ratio or may belong to a high-growth industry.
Considering that the industry has shrunk profits at a rate of 0.7% over the past few years, the company’s net income growth is quite impressive.
The basis for valuing a company is largely related to its revenue growth. The investor should try to ascertain whether the expected growth or decline in profit, as the case may be, is included in the price. This will help him determine whether the future of the stock looks promising or ominous. Is 9CI rated fairly? This infographic on company intrinsic value has everything you need to know.
Does CapitaLand Investment effectively reinvest its earnings?
Although CapitaLand Investment has a three-year average payout ratio of 61% (meaning it retains 39% of earnings), the company has still seen a fair amount of earnings growth in the past, meaning its high payout ratio has not hindered its ability to him to grow.
Alongside earnings growth, CapitaLand Investment only recently started paying dividends. It is quite possible that the company wanted to impress its shareholders. Looking at current analyst consensus data, we can see that the company’s future payout ratio is expected to grow to 80% over the next three years. However, the company’s ROE is not expected to change much despite the higher expected payout ratio.
Overall, CapitaLand Investment seems to have some positive aspects to its business. Namely, its significant earnings growth, which its modest rate of return likely contributed to. While the company pays out most of its earnings as dividends, it has been able to grow earnings nonetheless, so that’s probably a good sign. Researching current analyst estimates, we find that analysts expect the company to continue its recent growth streak. To learn more about the latest analyst estimates for the company, see this preview of analyst estimates for the company.
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This article from Simply Wall St 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 shares and does not take into account your goals or your financial situation. We aim to provide you with long-term focused analysis driven by fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or quality materials. Simply Wall St has no position in the stocks mentioned.