Shares of Singapore Technologies Engineering (SGX: S63) rose 2.7% over the past week. As most know, long-term fundamentals have a strong correlation with market price movements, so we decided to look at the company’s key financial metrics today to see if they have a role to play. in the recent price movement. In this article, we have decided to focus on the ROE of Singapore Technologies Engineering.
Return on equity or ROE is a test of how effectively a company increases its value and manages investor money. Simply put, it is used to assess a company’s profitability against its equity.
Check out our latest review for Singapore Technologies Engineering
How to calculate return on equity?
ROE can be calculated using the formula:
Return on equity = Net income (from continuing operations) ÷ Equity
Thus, based on the above formula, the ROE of Singapore Technologies Engineering is:
22% = S $ 564 million ÷ S $ 2.5 billion (based on the last twelve months to June 2021).
The “return” is the amount earned after tax over the past twelve months. Another way to think about this is that for every SGD 1 worth of equity, the company was able to make a profit of SGD 0.22.
What does ROE have to do with profit growth?
So far we’ve learned that ROE is a measure of a company’s profitability. Based on how much of those profits the company reinvests or “withholds” and how efficiently it does so, we are then able to assess a company’s profit growth potential. Assuming everything else remains the same, the higher the ROE and profit retention, the higher the growth rate of a business compared to businesses that don’t necessarily have these characteristics.
Singapore Technologies Engineering profit growth and 22% ROE
First of all, we love that Singapore Technologies Engineering has an impressive ROE. In addition, the company’s ROE is higher than the industry average of 8.3%, which is quite remarkable. However, for some reason the higher returns are not reflected in Singapore Technologies Engineering’s meager five-year average net profit growth of 3.5%. It’s a little unexpected from a company that has such a high rate of return. Such a scenario is likely to occur when a company pays out a large portion of its profits as dividends or is faced with competitive pressures.
Then, comparing with the growth in net income of the industry, we found that the reported growth of Singapore Technologies Engineering was lower than the industry growth by 10% during the same period, which we did not do not like to see.
Profit growth is a huge factor in the valuation of stocks. It is important for an investor to know whether the market has factored in the expected growth (or decline) in company earnings. This then helps them determine whether the stock is set for a bright or dark future. Has the market taken into account the future prospects of the S63? You can find out in our latest Intrinsic Value infographic research report.
Is Singapore Technologies Engineering Efficiently Reinvesting Its Profits?
With a high three-year median payout rate of 88% (or a retention rate of 12%), most of Singapore Technologies Engineering’s profits go to shareholders. This certainly contributes to the weak profit growth observed by the company.
In addition, Singapore Technologies Engineering has paid dividends over a period of at least ten years, suggesting that sustaining dividend payments is much more important to management, even if it comes at the expense of growing the business. ‘business. Estimates from existing analysts suggest that the company’s future payout ratio is expected to drop to 65% over the next three years. Either way, the ROE is not expected to change much for the company despite the expected lower payout ratio.
Overall, we think Singapore Technologies Engineering certainly has some positive factors to consider. However, although the company has a high ROE, its earnings growth figure is quite disappointing. This can be attributed to the fact that it only reinvests a small portion of its profits and pays the rest in the form of dividends. That said, looking at current analysts’ estimates, we found that the company’s earnings are expected to accelerate. To learn more about the company’s future earnings growth forecast, take a look at this free analyst forecast report for the company to learn more.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only 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. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative material. Simply Wall St has no position in the mentioned stocks.
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