Singapore Technologies Engineering Ltd's (SGX:S63) Has Had A Decent Run On The Stock market: Are Fundamentals In The Driver's Seat?

Singapore Technologies Engineering's (SGX:S63) stock is up by 2.9% over the past month. As most would know, long-term fundamentals have a strong correlation with market price movements, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. Particularly, we will be paying attention to Singapore Technologies Engineering's ROE today.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

See our latest analysis for Singapore Technologies Engineering

How To Calculate Return On Equity?

The formula for return on equity is:

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

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

20% = S$526m ÷ S$2.6b (Based on the trailing twelve months to December 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 SGD0.20 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 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.

Singapore Technologies Engineering's Earnings Growth And 20% ROE

To begin with, Singapore Technologies Engineering seems to have a respectable ROE. Especially when compared to the industry average of 7.6% the company's ROE looks pretty impressive. Yet, Singapore Technologies Engineering has posted measly growth of 2.8% over the past five years. This is generally not the case as when a company has a high rate of return it should usually also have a high earnings growth rate. Such a scenario is likely to take place when a company pays out a huge portion of its earnings as dividends, or is faced with competitive pressures.

Next, on comparing with the industry net income growth, we found that Singapore Technologies Engineering's reported growth was lower than the industry growth of 11% in the same period, which is not something we like to see.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. Has the market priced in the future outlook for S63? You can find out in our latest intrinsic value infographic research report.

Is Singapore Technologies Engineering Efficiently Re-investing Its Profits?

With a high three-year median payout ratio of 90% (or a retention ratio of 10%), most of Singapore Technologies Engineering's profits are being paid to shareholders. This definitely contributes to the low earnings growth seen by the company.

In addition, Singapore Technologies Engineering has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 74% of its profits over the next three years. Regardless, the future ROE for Singapore Technologies Engineering is predicted to rise to 25% despite there being not much change expected in its payout ratio.

Summary

Overall, we feel that Singapore Technologies Engineering certainly does have some positive factors to consider. However, while the company does have a high ROE, its earnings growth number is quite disappointing. This can be blamed on the fact that it reinvests only a small portion of its profits and pays out the rest as dividends. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. 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. 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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