Declining Stock and Solid Fundamentals: Is The Market Wrong About Food Empire Holdings Limited (SGX:F03)?

editorial-team@simplywallst.com (Simply Wall St)

Sun, May 5, 2024, 11:25 PM 4 min read

With its stock down 16% over the past month, it is easy to disregard Food Empire Holdings (SGX:F03). However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Specifically, we decided to study Food Empire Holdings' 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. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

Check out our latest analysis for Food Empire Holdings

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 Food Empire Holdings is:

19% = US$56m ÷ US$294m (Based on the trailing twelve months to December 2023).

The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every SGD1 worth of equity, the company was able to earn SGD0.19 in profit.

What Is The Relationship Between ROE And Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.

Food Empire Holdings' Earnings Growth And 19% ROE

To start with, Food Empire Holdings' ROE looks acceptable. On comparing with the average industry ROE of 5.6% the company's ROE looks pretty remarkable. Probably as a result of this, Food Empire Holdings was able to see an impressive net income growth of 25% over the last five years. We believe that there might also be other aspects that are positively influencing the company's earnings growth. Such as - high earnings retention or an efficient management in place.

We then compared Food Empire Holdings' net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 19% in the same 5-year period.

past-earnings-growth — SGX:F03 Past Earnings Growth May 6th 2024

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 Food Empire Holdings fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Food Empire Holdings Using Its Retained Earnings Effectively?

The three-year median payout ratio for Food Empire Holdings is 30%, which is moderately low. The company is retaining the remaining 70%. By the looks of it, the dividend is well covered and Food Empire Holdings is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Additionally, Food Empire Holdings has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Looking at the current analyst consensus data, we can see that the company's future payout ratio is expected to rise to 40% over the next three years. Regardless, the ROE is not expected to change much for the company despite the higher expected payout ratio.

Conclusion

Overall, we are quite pleased with Food Empire Holdings' performance. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. 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.