China Aviation Oil (Singapore) Corporation Ltd's (SGX:G92) Stock Is Going Strong: Have Financials A Role To Play?

China Aviation Oil (Singapore) (SGX:G92) has had a great run on the share market with its stock up by a significant 20% over the last three months. 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. Specifically, we decided to study China Aviation Oil (Singapore)'s ROE in this article.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

View our latest analysis for China Aviation Oil (Singapore)

How Do You 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 China Aviation Oil (Singapore) is:

8.3% = US$69m ÷ US$823m (Based on the trailing twelve months to June 2020).

The 'return' is the profit over the last twelve months. Another way to think of that is that for every SGD1 worth of equity, the company was able to earn SGD0.08 in profit.

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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

China Aviation Oil (Singapore)'s Earnings Growth And 8.3% ROE

On the face of it, China Aviation Oil (Singapore)'s ROE is not much to talk about. Yet, a closer study shows that the company's ROE is similar to the industry average of 8.3%. Even so, China Aviation Oil (Singapore) has shown a fairly decent growth in its net income which grew at a rate of 7.5%. Considering the moderately low ROE, it is quite possible that there might be some other aspects that are positively influencing the company's earnings growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

We then compared China Aviation Oil (Singapore)'s net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 14% in the same period, which is a bit concerning.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about China Aviation Oil (Singapore)'s's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is China Aviation Oil (Singapore) Efficiently Re-investing Its Profits?

China Aviation Oil (Singapore) has a healthy combination of a moderate three-year median payout ratio of 31% (or a retention ratio of 69%) and a respectable amount of growth in earnings as we saw above, meaning that the company has been making efficient use of its profits.

Additionally, China Aviation Oil (Singapore) has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 30%. As a result, China Aviation Oil (Singapore)'s ROE is not expected to change by much either, which we inferred from the analyst estimate of 8.0% for future ROE.

Summary

Overall, we feel that China Aviation Oil (Singapore) certainly does have some positive factors to consider. That is, a decent growth in earnings backed by a high rate of reinvestment. However, we do feel that that earnings growth could have been higher if the business were to improve on the low ROE rate. Especially given how the company is reinvesting a huge chunk of its profits. 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 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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