CapitaLand Integrated Commercial Trust's (SGX:C38U) Stock Going Strong But Fundamentals Look Weak: What Implications Could This Have On The Stock?

Most readers would already be aware that CapitaLand Integrated Commercial Trust's (SGX:C38U) stock increased significantly by 9.1% over the past month. We, however wanted to have a closer look at its key financial indicators as the markets usually pay for long-term fundamentals, and in this case, they don't look very promising. Specifically, we decided to study CapitaLand Integrated Commercial Trust's ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for CapitaLand Integrated Commercial Trust

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 CapitaLand Integrated Commercial Trust is:

1.9% = S$143m ÷ S$7.4b (Based on the trailing twelve months to September 2020).

The 'return' is the income the business earned over the last year. Another way to think of that is that for every SGD1 worth of equity, the company was able to earn SGD0.02 in profit.

What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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.

CapitaLand Integrated Commercial Trust's Earnings Growth And 1.9% ROE

As you can see, CapitaLand Integrated Commercial Trust's ROE looks pretty weak. Even compared to the average industry ROE of 5.4%, the company's ROE is quite dismal. Therefore, it might not be wrong to say that the five year net income decline of 3.6% seen by CapitaLand Integrated Commercial Trust was possibly a result of it having a lower ROE. However, there could also be other factors causing the earnings to decline. For example, the business has allocated capital poorly, or that the company has a very high payout ratio.

That being said, we compared CapitaLand Integrated Commercial 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 7.6% in the same period.

Earnings growth is an important metric to consider when valuing a stock. 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 CapitaLand Integrated Commercial Trust's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is CapitaLand Integrated Commercial Trust Using Its Retained Earnings Effectively?

CapitaLand Integrated Commercial Trust seems to be paying out most of its income as dividends judging by its three-year median payout ratio of 91% (meaning, the company retains only 9.4% of profits). However, this is typical for REITs as they are often required by law to distribute most of their earnings. So this probably explains the company's shrinking earnings.

Additionally, CapitaLand Integrated Commercial Trust has paid dividends over a period of at least ten years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth. Looking at the current analyst consensus data, we can see that the company's future payout ratio is expected to rise to 112% over the next three years. Regardless, the future ROE for CapitaLand Integrated Commercial Trust is speculated to rise to 5.4% despite the anticipated increase in the payout ratio. There could probably be other factors that could be driving the future growth in the ROE.

Summary

In total, we would have a hard think before deciding on any investment action concerning CapitaLand Integrated Commercial Trust. The company has seen a lack of earnings growth as a result of retaining very little profits and whatever little it does retain, is being reinvested at a very low rate of return. 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. 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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