Has Jardine Cycle & Carriage Limited's (SGX:C07) Impressive Stock Performance Got Anything to Do With Its Fundamentals?

Jardine Cycle & Carriage (SGX:C07) has had a great run on the share market with its stock up by a significant 12% over the last month. As most would know, fundamentals are what usually guide market price movements over the long-term, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. Particularly, we will be paying attention to Jardine Cycle & Carriage'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. Put another way, it reveals the company's success at turning shareholder investments into profits.

View our latest analysis for Jardine Cycle & Carriage

How To Calculate Return On Equity?

The formula for return on equity is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Jardine Cycle & Carriage is:

12% = US$1.9b ÷ US$15b (Based on the trailing twelve months to June 2020).

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 SGD0.12 in profit.

What Has ROE Got To Do With Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

A Side By Side comparison of Jardine Cycle & Carriage's Earnings Growth And 12% ROE

At first glance, Jardine Cycle & Carriage seems to have a decent ROE. On comparing with the average industry ROE of 5.7% the company's ROE looks pretty remarkable. However, we are curious as to how the high returns still resulted in flat growth for Jardine Cycle & Carriage in the past five years. We reckon that there could be some other factors at play here that's limiting the company's growth. Such as, the company pays out a huge portion of its earnings as dividends, or is faced with competitive pressures.

Next, on comparing with the industry net income growth, we found that Jardine Cycle & Carriage's reported growth was lower than the industry growth of 5.5% in the same period, which is not something we like to see.

Earnings growth is a huge factor in stock valuation. 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. If you're wondering about Jardine Cycle & Carriage's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Jardine Cycle & Carriage Making Efficient Use Of Its Profits?

Despite having a moderate three-year median payout ratio of 44% (meaning the company retains56% of profits) in the last three-year period, Jardine Cycle & Carriage's earnings growth was more or les flat. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.

Moreover, Jardine Cycle & Carriage 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. 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 38%. However, Jardine Cycle & Carriage's future ROE is expected to decline to 9.3% despite there being not much change anticipated in the company's payout ratio.

Summary

On the whole, we do feel that Jardine Cycle & Carriage has some positive attributes. Although, we are disappointed to see a lack of growth in earnings even in spite of a high ROE and and a high reinvestment rate. We believe that there might be some outside factors that could be having a negative impact on the business. 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 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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