CapitaLand Investment Limited's (SGX:9CI) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?

With its stock down 4.8% over the past three months, it is easy to disregard CapitaLand Investment (SGX:9CI). But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. In this article, we decided to focus on CapitaLand Investment's 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.

View our latest analysis for CapitaLand Investment

How Is ROE Calculated?

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 CapitaLand Investment is:

1.8% = S$333m ÷ S$18b (Based on the trailing twelve months to December 2023).

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 SGD0.02 in profit.

What Is The Relationship Between ROE And Earnings Growth?

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

A Side By Side comparison of CapitaLand Investment's Earnings Growth And 1.8% ROE

It is quite clear that CapitaLand Investment's ROE is rather low. Even compared to the average industry ROE of 3.3%, the company's ROE is quite dismal. Therefore, the disappointing ROE therefore provides a background to CapitaLand Investment's very little net income growth of 2.3% over the past five years.

We then compared CapitaLand Investment's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 1.9% in the same 5-year period.

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). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is 9CI fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is CapitaLand Investment Efficiently Re-investing Its Profits?

With a high three-year median payout ratio of 71% (or a retention ratio of 29%), most of CapitaLand Investment's profits are being paid to shareholders. This definitely contributes to the low earnings growth seen by the company.

Only recently, CapitaLand Investment started paying a dividend. This means that the management might have concluded that its shareholders prefer dividends over earnings growth. 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 61%. Regardless, the future ROE for CapitaLand Investment is predicted to rise to 6.6% despite there being not much change expected in its payout ratio.

Conclusion

On the whole, we do feel that CapitaLand Investment has some positive attributes. Namely, its high earnings growth. We do however feel that the earnings growth number could have been even higher, had the company been reinvesting more of its earnings and paid out less dividends. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.