CapitaLand Investment (SGX:9CI) has had a rough three months with its share price down 4.1%. 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 Investment's ROE.

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. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

How Is ROE Calculated?

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 Investment is:

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

The 'return' is the yearly profit. That means that for every SGD1 worth of shareholders' equity, the company generated SGD0.02 in profit.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.

A Side By Side comparison of CapitaLand Investment's Earnings Growth And 1.8% ROE

As you can see, CapitaLand Investment's ROE looks pretty weak. Even compared to the average industry ROE of 3.4%, the company's ROE is quite dismal. 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.

As a next step, we compared CapitaLand Investment'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 0.3%.

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. What is 9CI worth today? The intrinsic value infographic in our free research report helps visualize whether 9CI is currently mispriced by the market.

Is CapitaLand Investment Efficiently Re-investing 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.

In addition, CapitaLand Investment only recently started paying a dividend so the management must have decided the shareholders prefer dividends over earnings growth. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 61%. Still, forecasts suggest that CapitaLand Investment's future ROE will rise to 6.6% even though the the company's payout ratio is not expected to change by much.

Summary

On the whole, we do feel that CapitaLand Investment has some positive attributes. That is, quite an impressive growth in earnings. However, the low profit retention means that the company's earnings growth could have been higher, had it been reinvesting a higher portion of its profits. 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.