Is Weakness In Jardine Cycle & Carriage Limited (SGX:C07) Stock A Sign That The Market Could be Wrong Given Its Strong Financial Prospects?

With its stock down 15% over the past three months, it is easy to disregard Jardine Cycle & Carriage (SGX:C07). However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. In this article, we decided to focus on Jardine Cycle & Carriage's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Put another way, it reveals the company's success at turning shareholder investments into profits.

See our latest analysis for Jardine Cycle & Carriage

How Do You Calculate Return On Equity?

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 Jardine Cycle & Carriage is:

17% = US$3.0b ÷ US$18b (Based on the trailing twelve months to December 2023).

The 'return' is the income the business earned over the last year. So, this means that for every SGD1 of its shareholder's investments, the company generates a profit of SGD0.17.

What Is The Relationship Between ROE And Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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 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.

Jardine Cycle & Carriage's Earnings Growth And 17% ROE

At first glance, Jardine Cycle & Carriage seems to have a decent ROE. Especially when compared to the industry average of 8.4% the company's ROE looks pretty impressive. This certainly adds some context to Jardine Cycle & Carriage's decent 11% net income growth seen over the past five years.

Next, on comparing Jardine Cycle & Carriage's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 13% over the last few years.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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 C07 fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Jardine Cycle & Carriage Efficiently Re-investing Its Profits?

Jardine Cycle & Carriage has a three-year median payout ratio of 44%, which implies that it retains the remaining 56% of its profits. This suggests that its dividend is well covered, and given the decent growth seen by the company, it looks like management is reinvesting its earnings efficiently.

Besides, Jardine Cycle & Carriage has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 40% of its profits over the next three years. Regardless, Jardine Cycle & Carriage's ROE is speculated to decline to 11% despite there being no anticipated change in its payout ratio.

Conclusion

Overall, we are quite pleased with Jardine Cycle & Carriage's performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. 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. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.