With its stock down 2.6% over the past three months, it is easy to disregard Genting Singapore (SGX:G13). We decided to study the company's financials to determine if the downtrend will continue as the long-term performance of a company usually dictates market outcomes. In this article, we decided to focus onGenting Singapore'sROE.
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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
How Is ROE Calculated?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Genting Singapore is:
2.3% = S$183m ÷ S$7.9b (Based on the trailing twelve months to December 2021).
The 'return' is the profit over the last twelve months. That means that for every SGD1 worth of shareholders' equity, the company generated SGD0.02 in profit.
Why Is ROE Important For Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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 Genting Singapore's Earnings Growth And 2.3% ROE
It is hard to argue that Genting Singapore's ROE is much good in and of itself. Not just that, even compared to the industry average of 4.8%, the company's ROE is entirely unremarkable. Therefore, it might not be wrong to say that the five year net income decline of 19% seen by Genting Singapore was possibly a result of it having a lower ROE. We reckon that there could also be other factors at play here. For example, the business has allocated capital poorly, or that the company has a very high payout ratio.
Next, on comparing with the industry net income growth, we found that Genting Singapore's earnings seems to be shrinking at a similar rate as the industry which shrunk at a rate of a rate of 16% in the same period.
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. Is Genting Singapore fairly valued compared to other companies? These3 valuation measuresmight help you decide.
Is Genting Singapore Using Its Retained Earnings Effectively?
With a high three-year median payout ratio of 66% (implying that 34% of the profits are retained), most of Genting Singapore's profits are being paid to shareholders, which explains the company's shrinking earnings. With only very little left to reinvest into the business, growth in earnings is far from likely.
Moreover, Genting Singapore has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth. 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 73%. Still, forecasts suggest that Genting Singapore's future ROE will rise to 7.1% even though the the company's payout ratio is not expected to change by much.
Conclusion
On the whole, Genting Singapore's performance is quite a big let-down. As a result of its low ROE and lack of much reinvestment into the business, the company has seen a disappointing earnings growth rate. That being so, the latest industry analyst forecasts show that the analysts are expecting to see a huge improvement in the company's earnings growth rate. $GENTING SINGAPORE LIMITED(G13.SI)$
source：simplywall.st
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