Do Fundamentals Have Any Role To Play In Driving CapitaLand India Trust's (SGX:CY6U) Stock Up Recently?

CapitaLand India Trust's (SGX:CY6U) stock is up by 4.8% over the past week. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to investigate if the company's decent financials had a hand to play in the recent price move. Specifically, we decided to study CapitaLand India Trust's ROE in this article.

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. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out our latest analysis for CapitaLand India Trust

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 CapitaLand India Trust is:

12% = S$190m ÷ S$1.6b (Based on the trailing twelve months to June 2024).

The 'return' is the profit over the last twelve months. So, this means that for every SGD1 of its shareholder's investments, the company generates a profit of SGD0.12.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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 India Trust's Earnings Growth And 12% ROE

To start with, CapitaLand India Trust's ROE looks acceptable. On comparing with the average industry ROE of 3.4% the company's ROE looks pretty remarkable. As you might expect, the 6.9% net income decline reported by CapitaLand India Trust is a bit of a surprise. Based on this, we feel that there might be other reasons which haven't been discussed so far in this article that could be hampering the company's growth. Such as, the company pays out a huge portion of its earnings as dividends, or is faced with competitive pressures.

That being said, we compared CapitaLand India Trust's performance with the industry and were concerned when we found that while the company has shrunk its earnings, the industry has grown its earnings at a rate of 2.3% 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). This then helps them determine if the stock is placed for a bright or bleak future. What is CY6U worth today? The intrinsic value infographic in our free research report helps visualize whether CY6U is currently mispriced by the market.

Is CapitaLand India Trust Using Its Retained Earnings Effectively?

With a high three-year median payout ratio of 58% (implying that 42% of the profits are retained), most of CapitaLand India Trust's profits are being paid to shareholders, which explains the company's shrinking earnings. With only very little left to reinvest into the business, growth in earnings is far from likely. To know the 3 risks we have identified for CapitaLand India Trust visit our risks dashboard for free.

Moreover, CapitaLand India Trust 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 rise to 100% over the next three years. Consequently, the higher expected payout ratio explains the decline in the company's expected ROE (to 8.4%) over the same period.

Conclusion

Overall, we feel that CapitaLand India Trust certainly does have some positive factors to consider. Yet, the low earnings growth is a bit concerning, especially given that the company has a high rate of return. Investors could have benefitted from the high ROE, had the company been reinvesting more of its earnings. As discussed earlier, the company is retaining a small portion of its profits. That being so, the latest industry analyst forecasts show that the analysts are expecting to see a huge improvement in the company's earnings growth rate. 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. 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.