With its stock down 6.6% over the past month, it is easy to disregard CapitaLand Mall Trust (SGX:C38U). Given that stock prices are usually driven by a company’s fundamentals over the long term, which in this case look pretty weak, we decided to study the company's key financial indicators. Particularly, we will be paying attention to CapitaLand Mall Trust's ROE today.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.
How Do You Calculate Return On Equity?
ROE 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 Mall Trust is:
2.4% = S$178m ÷ S$7.4b (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 SGD0.02 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. 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 Mall Trust's Earnings Growth And 2.4% ROE
It is quite clear that CapitaLand Mall Trust's ROE is rather low. Even compared to the average industry ROE of 5.5%, the company's ROE is quite dismal. As a result, CapitaLand Mall Trust's flat earnings over the past five years doesn't come as a surprise given its lower ROE.
As a next step, we compared CapitaLand Mall Trust's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 5.7% in the same period.
Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is C38U fairly valued? This infographic on the company's intrinsic value has everything you need to know.
Is CapitaLand Mall Trust Efficiently Re-investing Its Profits?
CapitaLand Mall Trust has a very high three-year median payout ratio of 91% (or a retention ratio of 9.4%). However, it's not unusual to see a REIT with such a high payout ratio mainly due to statutory requirements. So this probably explains the absence of growth in earnings.
In addition, CapitaLand Mall Trust 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. 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 97%. Regardless, the future ROE for CapitaLand Mall Trust is predicted to rise to 6.1% despite there being not much change expected in its payout ratio.
Overall, we would be extremely cautious before making any decision on CapitaLand Mall 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. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. 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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