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.

Is CapitaLand Investment Making Efficient Use Of Its Profits?

With a high three-year median payout ratio of 71% (or a retention ratio of 29%), most of CapitaLand Investment's profits are being paid to shareholders. This definitely contributes to the low earnings growth seen by the company.

Only recently, CapitaLand Investment started paying a dividend. This means that the management might have concluded that its shareholders prefer dividends over earnings growth. Our latest analyst data shows that the future payout ratio of the company is expected to drop to 56% over the next three years. As a result, the expected drop in CapitaLand Investment's payout ratio explains the anticipated rise in the company's future ROE to 6.6%, over the same period.

Conclusion

On the whole, we feel that the performance shown by CapitaLand Investment can be open to many interpretations. Although the company has shown a fair bit of growth in earnings, the reinvestment rate is low. Meaning, the earnings growth number could have been significantly higher had the company been retaining more of its profits and reinvesting that at a higher rate of return. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. 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. 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.