CapitaLand India Trust’s (SGX:CY6U) Stock Has Shown Weakness Lately But Financial Prospects Look Decent: Is The Market Wrong?
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With its stock down 6.1% over the past month, it is easy to disregard CapitaLand India Trust (SGX:CY6U). But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. In this article, we decided to focus on CapitaLand India Trust’s ROE.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company’s shareholders.
View our latest analysis for CapitaLand India Trust
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 CapitaLand India Trust is:
12% = S$190m ÷ S$1.6b (Based on the trailing twelve months to June 2024).
The ‘return’ is the profit over the last twelve months. That means that for every SGD1 worth of shareholders’ equity, the company generated SGD0.12 in profit.
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. 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.
To begin with, CapitaLand India Trust seems to have a respectable ROE. Especially when compared to the industry average of 3.1% the company’s ROE looks pretty impressive. Needless to say, we are quite surprised to see that CapitaLand India Trust’s net income shrunk at a rate of 6.9% over the past five years. Therefore, there might be some other aspects that could explain this. For example, it could be that the company has a high payout ratio or the business has allocated capital poorly, for instance.
That being said, we compared CapitaLand India Trust’s performance with the industry and were concerned when we found that while the company has shrunk its earnings, the industry has grown its earnings at a rate of 2.3% in the same 5-year period.
SGX:CY6U Past Earnings Growth November 19th 2024
Earnings growth is an important metric to consider when valuing a stock. 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.
CapitaLand India Trust’s declining earnings is not surprising given how the company is spending most of its profits in paying dividends, judging by its three-year median payout ratio of 58% (or a retention ratio of 42%). With only very little left to reinvest into the business, growth in earnings is far from likely. You can see the 3 risks we have identified for CapitaLand India Trust by visiting our risks dashboard for free on our platform here.
Additionally, CapitaLand India Trust has paid dividends over a period of at least ten years, which means that the company’s management is determined to pay dividends even if it means little to no earnings growth. Upon studying the latest analysts’ consensus data, we found that the company’s future payout ratio is expected to rise to 100% over the next three years. Therefore, the expected rise in the payout ratio explains why the company’s ROE is expected to decline to 8.4% over the same period.
On the whole, we do feel that CapitaLand India Trust has some positive attributes. Yet, the low earnings growth is a bit concerning, especially given that the company has a high rate of return. Investors could have benefitted from the high ROE, had the company been reinvesting more of its earnings. As discussed earlier, the company is retaining a small portion of its profits. Having said that, looking at current analyst estimates, we found that the company’s earnings growth rate is expected to see a huge improvement. 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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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.
