CapitaLand India Trust's (SGX:CY6U) Stock Is Rallying But Financials Look Ambiguous: Will The Momentum Continue?
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Most readers would already be aware that CapitaLand India Trust's (SGX:CY6U) stock increased significantly by 6.1% over the past month. But the company's key financial indicators appear to be differing across the board and that makes us question whether or not the company's current share price momentum can be maintained. Specifically, we decided to study CapitaLand India Trust's ROE in this article.
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.
See our latest analysis for CapitaLand India Trust
How To 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 CapitaLand India Trust is:
9.6% = S$158m ÷ S$1.6b (Based on the trailing twelve months to December 2023).
The 'return' is the profit over the last twelve months. Another way to think of that is that for every SGD1 worth of equity, the company was able to earn SGD0.10 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. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.
CapitaLand India Trust's Earnings Growth And 9.6% ROE
When you first look at it, CapitaLand India Trust's ROE doesn't look that attractive. Although a closer study shows that the company's ROE is higher than the industry average of 3.3% which we definitely can't overlook. But then again, seeing that CapitaLand India Trust's net income shrunk at a rate of 9.0% in the past five years, makes us think again. Bear in mind, the company does have a slightly low ROE. It is just that the industry ROE is lower. Hence, this goes some way in explaining the shrinking earnings.
However, when we compared CapitaLand India Trust's growth with the industry we found that while the company's earnings have been shrinking, the industry has seen an earnings growth of 0.3% in the same period. This is quite worrisome.
