Venture Corporation Limited's (SGX:V03) Stock Has Fared Decently: Is the Market Following Strong Financials?

Venture's (SGX:V03) stock up by 2.9% over the past month. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Particularly, we will be paying attention to Venture's ROE today.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for Venture

How Is ROE Calculated?

Return on equity 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 Venture is:

12% = S$307m ÷ S$2.5b (Based on the trailing twelve months to September 2020).

The 'return' refers to a company's earnings over the last year. That means that for every SGD1 worth of shareholders' equity, the company generated SGD0.12 in profit.

Why Is ROE Important For 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.

Venture's Earnings Growth And 12% ROE

To start with, Venture's ROE looks acceptable. Further, the company's ROE compares quite favorably to the industry average of 9.1%. This probably laid the ground for Venture's moderate 18% net income growth seen over the past five years.

Given that the industry shrunk its earnings at a rate of 7.7% in the same period, the net income growth of the company is quite impressive.

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. Is V03 fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Venture Using Its Retained Earnings Effectively?

The high three-year median payout ratio of 54% (or a retention ratio of 46%) for Venture suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Additionally, Venture has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 58% of its profits over the next three years. Accordingly, forecasts suggest that Venture's future ROE will be 14% which is again, similar to the current ROE.

Conclusion

In total, we are pretty happy with Venture's performance. Especially the high ROE, Which has contributed to the impressive growth seen in earnings. Despite the company reinvesting only a small portion of its profits, it still has managed to grow its earnings so that is appreciable. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. 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. 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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