Boustead Projects Limited's (SGX:AVM) Financials Are Too Obscure To Link With Current Share Price Momentum: What's In Store For the Stock?

Boustead Projects' (SGX:AVM) stock is up by a considerable 23% over the past three months. However, we decided to pay attention to the company's fundamentals which don't appear to give a clear sign about the company's financial health. In this article, we decided to focus on Boustead Projects' ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Check out our latest analysis for Boustead Projects

How To Calculate Return On Equity?

Return on equity 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 Boustead Projects is:

3.5% = S$10m ÷ S$292m (Based on the trailing twelve months to September 2020).

The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each SGD1 of shareholders' capital it has, the company made SGD0.04 in profit.

What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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 Boustead Projects' Earnings Growth And 3.5% ROE

It is quite clear that Boustead Projects' ROE is rather low. An industry comparison shows that the company's ROE is not much different from the industry average of 3.2% either. Given the circumstances, the significant decline in net income by 5.6% seen by Boustead Projects over the last five years is not surprising.

We then compared Boustead Projects' performance with the industry and found that the company has shrunk its earnings at a slower rate than the industry earnings which has seen its earnings shrink by 22% in the same period. This does offer shareholders some relief

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. Is Boustead Projects fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Boustead Projects Using Its Retained Earnings Effectively?

Boustead Projects' low three-year median payout ratio of 15% (or a retention ratio of 85%) over the last three years should mean that the company is retaining most of its earnings to fuel its growth but the company's earnings have actually shrunk. This typically shouldn't be the case when a company is retaining most of its earnings. It looks like there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.

Additionally, Boustead Projects has paid dividends over a period of six years, which means that the company's management is rather focused on keeping up its dividend payments, regardless of the shrinking earnings. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 14% of its profits over the next three years. As a result, Boustead Projects' ROE is not expected to change by much either, which we inferred from the analyst estimate of 3.9% for future ROE.

Summary

In total, we're a bit ambivalent about Boustead Projects' performance. While the company does have a high rate of profit retention, its low rate of return is probably hampering its earnings growth. Moreover, after studying current analyst estimates, we discovered that the company's earnings are expected to continue to shrink in the future. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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