COSCO Shipping International (Singapore) Co., Ltd.'s (SGX:F83) Stock Has Seen Strong Momentum: Does That Call For Deeper Study Of Its Financial Prospects?

COSCO Shipping International (Singapore) (SGX:F83) has had a great run on the share market with its stock up by a significant 49% over the last month. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. Particularly, we will be paying attention to COSCO Shipping International (Singapore)'s ROE today.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for COSCO Shipping International (Singapore)

How Do You 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 COSCO Shipping International (Singapore) is:

0.9% = S$4.7m ÷ S$542m (Based on the trailing twelve months to June 2020).

The 'return' refers to a company's earnings over the last year. So, this means that for every SGD1 of its shareholder's investments, the company generates a profit of SGD0.01.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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 COSCO Shipping International (Singapore)'s Earnings Growth And 0.9% ROE

As you can see, COSCO Shipping International (Singapore)'s ROE looks pretty weak. Even when compared to the industry average of 9.2%, the ROE figure is pretty disappointing. However, we we're pleasantly surprised to see that COSCO Shipping International (Singapore) grew its net income at a significant rate of 25% in the last five years. Therefore, there could be other reasons behind this growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

As a next step, we compared COSCO Shipping International (Singapore)'s net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 16%.

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). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is COSCO Shipping International (Singapore) fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is COSCO Shipping International (Singapore) Efficiently Re-investing Its Profits?

COSCO Shipping International (Singapore) doesn't pay any dividend currently which essentially means that it has been reinvesting all of its profits into the business. This definitely contributes to the high earnings growth number that we discussed above.

Summary

In total, it does look like COSCO Shipping International (Singapore) has some positive aspects to its business. Despite its low rate of return, the fact that the company reinvests a very high portion of its profits into its business, no doubt contributed to its high earnings growth. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. You can see the 4 risks we have identified for COSCO Shipping International (Singapore) by visiting our risks dashboard for free on our platform here.

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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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