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It is hard to get excited after looking at Singapore Telecommunications' (SGX:Z74) recent performance, when its stock has declined 3.7% over the past month. 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. In this article, we decided to focus on Singapore Telecommunications' ROE.
Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.
View our latest analysis for Singapore Telecommunications
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 Singapore Telecommunications is:
4.1% = S$1.0b ÷ S$25b (Based on the trailing twelve months to June 2024).
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 SGD0.04 in profit.
What Is The Relationship Between ROE And Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.
A Side By Side comparison of Singapore Telecommunications' Earnings Growth And 4.1% ROE
It is hard to argue that Singapore Telecommunications' ROE is much good in and of itself. Even when compared to the industry average of 12%, the ROE figure is pretty disappointing. Singapore Telecommunications was still able to see a decent net income growth of 8.5% over the past five years. We reckon that there could be other factors at play here. Such as - high earnings retention or an efficient management in place.
As a next step, we compared Singapore Telecommunications' net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 13% in the same period.