SBS Transit Ltd's (SGX:S61) Stock Has Been Sliding But Fundamentals Look Strong: Is The Market Wrong?

With its stock down 2.9% over the past three months, it is easy to disregard SBS Transit (SGX:S61). But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. Particularly, we will be paying attention to SBS Transit'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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View our latest analysis for SBS Transit

How Do You Calculate Return On Equity?

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 SBS Transit is:

13% = S$79m ÷ S$587m (Based on the trailing twelve months to December 2020).

The 'return' is the profit over the last twelve months. That means that for every SGD1 worth of shareholders' equity, the company generated SGD0.13 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. 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.

SBS Transit's Earnings Growth And 13% ROE

To begin with, SBS Transit seems to have a respectable ROE. On comparing with the average industry ROE of 6.0% the company's ROE looks pretty remarkable. Probably as a result of this, SBS Transit was able to see an impressive net income growth of 26% over the last five years. We reckon that there could also be other factors at play here. For instance, the company has a low payout ratio or is being managed efficiently.

As a next step, we compared SBS Transit'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 4.7%.

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). Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about SBS Transit's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is SBS Transit Using Its Retained Earnings Effectively?

SBS Transit's three-year median payout ratio is a pretty moderate 50%, meaning the company retains 50% of its income. So it seems that SBS Transit is reinvesting efficiently in a way that it sees impressive growth in its earnings (discussed above) and pays a dividend that's well covered.

Besides, SBS Transit has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 50% of its profits over the next three years. Accordingly, forecasts suggest that SBS Transit's future ROE will be 13% which is again, similar to the current ROE.

Conclusion

Overall, we are quite pleased with SBS Transit'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. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. 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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