Is Boustead Singapore Limited's (SGX:F9D) Recent Stock Performance Influenced By Its Fundamentals In Any Way?

Most readers would already be aware that Boustead Singapore's (SGX:F9D) stock increased significantly by 9.0% over the past month. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. In this article, we decided to focus on Boustead Singapore'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. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Check out our latest analysis for Boustead Singapore

How To Calculate Return On Equity?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Boustead Singapore is:

9.6% = S$49m ÷ S$512m (Based on the trailing twelve months to September 2020).

The 'return' is the yearly profit. That means that for every SGD1 worth of shareholders' equity, the company generated SGD0.10 in profit.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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.

Boustead Singapore's Earnings Growth And 9.6% ROE

At first glance, Boustead Singapore's ROE doesn't look very promising. However, the fact that the company's ROE is higher than the average industry ROE of 4.7%, is definitely interesting. However, Boustead Singapore has seen a flattish net income growth over the past five years, which is not saying much. Bear in mind, the company does have a slightly low ROE. It is just that the industry ROE is lower. Therefore, the low to flat growth in earnings could also be the result of this.

Next, we compared Boustead Singapore's performance against the industry and found that the industry shrunk its earnings at 23% in the same period, which suggests that the company's earnings have been shrinking at a slower rate than its industry, This does offer shareholders some relief

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. 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 Boustead Singapore is trading on a high P/E or a low P/E, relative to its industry.

Is Boustead Singapore Efficiently Re-investing Its Profits?

Despite having a normal three-year median payout ratio of 48% (implying that the company keeps 52% of its income) over the last three years, Boustead Singapore has seen a negligible amount of growth in earnings as we saw above. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.

Moreover, Boustead 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. Our latest analyst data shows that the future payout ratio of the company is expected to drop to 38% over the next three years. Despite the lower expected payout ratio, the company's ROE is not expected to change by much.

Conclusion

Overall, we feel that Boustead Singapore certainly does have some positive factors to consider. Although, we are disappointed to see a lack of growth in earnings even in spite of a moderate ROE and and a high reinvestment rate. We believe that there might be some outside factors that could be having a negative impact on the business. In addition, on studying the latest analyst forecasts, we found that the company's earnings are expected to continue to shrink. 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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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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