Could The Market Be Wrong About Ascendas India Trust (SGX:CY6U) Given Its Attractive Financial Prospects?

By
Simply Wall St
Published
February 19, 2022
SGX:CY6U
Source: Shutterstock

It is hard to get excited after looking at Ascendas India Trust's (SGX:CY6U) recent performance, when its stock has declined 15% over the past three months. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Particularly, we will be paying attention to Ascendas India Trust's ROE today.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for Ascendas India Trust

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 Ascendas India Trust is:

14% = S$200m ÷ S$1.4b (Based on the trailing twelve months to December 2021).

The 'return' is the yearly profit. Another way to think of that is that for every SGD1 worth of equity, the company was able to earn SGD0.14 in profit.

Why Is ROE Important For Earnings Growth?

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

A Side By Side comparison of Ascendas India Trust's Earnings Growth And 14% ROE

At first glance, Ascendas India Trust seems to have a decent ROE. Especially when compared to the industry average of 5.4% the company's ROE looks pretty impressive. However, for some reason, the higher returns aren't reflected in Ascendas India Trust's meagre five year net income growth average of 2.0%. This is generally not the case as when a company has a high rate of return it should usually also have a high earnings growth rate. A few likely reasons why this could happen is that the company could have a high payout ratio or the business has allocated capital poorly, for instance.

Next, on comparing with the industry net income growth, we found that the growth figure reported by Ascendas India Trust compares quite favourably to the industry average, which shows a decline of 0.07% in the same period.

past-earnings-growth
SGX:CY6U Past Earnings Growth February 19th 2022

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. Is CY6U fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Ascendas India Trust Efficiently Re-investing Its Profits?

Despite having a normal three-year median payout ratio of 46% (or a retention ratio of 54% over the past three years, Ascendas India Trust has seen very little growth in earnings as we saw above. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.

Moreover, Ascendas 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 99% over the next three years. Accordingly, the expected increase in the payout ratio explains the expected decline in the company's ROE to 8.8%, over the same period.

Conclusion

In total, we are pretty happy with Ascendas India Trust's performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. 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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