With its stock down 11% over the past three months, it is easy to disregard CapitaLand Investment (SGX:9CI). It is possible that the markets have ignored the company's differing financials and decided to lean-in to the negative sentiment. Fundamentals usually dictate market outcomes so it makes sense to study the company's financials. Specifically, we decided to study CapitaLand Investment's ROE in this article.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

See our latest analysis for CapitaLand Investment

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 CapitaLand Investment is:

1.8% = S$333m ÷ S$18b (Based on the trailing twelve months to December 2023).

The 'return' is the income the business earned over the last year. Another way to think of that is that for every SGD1 worth of equity, the company was able to earn SGD0.02 in profit.

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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.

CapitaLand Investment's Earnings Growth And 1.8% ROE

As you can see, CapitaLand Investment's ROE looks pretty weak. Not just that, even compared to the industry average of 3.1%, the company's ROE is entirely unremarkable. Therefore, the disappointing ROE therefore provides a background to CapitaLand Investment's very little net income growth of 2.3% over the past five years.

We then performed a comparison between CapitaLand Investment's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 2.7% in the same 5-year period.

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. Is 9CI fairly valued? This infographic on the company's intrinsic value has everything you need to know.