Sheng Siong Group (SGX:OV8) has had a great run on the share market with its stock up by a significant 10% over the last three months. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. In this article, we decided to focus on Sheng Siong Group’s ROE.
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. Put another way, it reveals the company’s success at turning shareholder investments into profits.
Check out our latest analysis for Sheng Siong Group
How Is ROE Calculated?
ROE 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 Sheng Siong Group is:
29% = S$113m ÷ S$391m (Based on the trailing twelve months to June 2020).
The ‘return’ is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each SGD1 of shareholders’ capital it has, the company made SGD0.29 in profit.
What Has ROE Got To Do With Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.
Sheng Siong Group’s Earnings Growth And 29% ROE
Firstly, we acknowledge that Sheng Siong Group has a significantly high ROE. Second, a comparison with the average ROE reported by the industry of 7.8% also doesn’t go unnoticed by us. This probably laid the groundwork for Sheng Siong Group’s moderate 10% net income growth seen over the past five years.
We then performed a comparison between Sheng Siong Group’s net income growth with the industry, which revealed that the company’s growth is similar to the average industry growth of 10% in the same period.
Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company’s expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Sheng Siong Group is trading on a high P/E or a low P/E, relative to its industry.
Is Sheng Siong Group Making Efficient Use Of Its Profits?
While Sheng Siong Group has a three-year median payout ratio of 71% (which means it retains 29% of profits), the company has still seen a fair bit of earnings growth in the past, meaning that its high payout ratio hasn’t hampered its ability to grow.
Additionally, Sheng Siong Group has paid dividends over a period of nine years which means that the company is pretty serious about sharing its profits with shareholders. Upon studying the latest analysts’ consensus data, we found that the company is expected to keep paying out approximately 72% of its profits over the next three years. Therefore, the company’s future ROE is also not expected to change by much with analysts predicting an ROE of 28%.
Conclusion
In total, we are pretty happy with Sheng Siong Group’s performance. In particular, its high ROE is quite noteworthy and also the probable explanation behind its considerable earnings growth. Yet, the company is retaining a small portion of its profits. Which means that the company has been able to grow its earnings in spite of it, so that’s not too bad. Having said that, on studying current analyst estimates, we were concerned to see that while the company has grown its earnings in the past, analysts expect its earnings to shrink in the future. Are these analysts expectations based on the broad expectations for the industry, or on the company’s fundamentals? Click here to be taken to our analyst’s forecasts page for the company.
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