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APAC Realty's (SGX:CLN) stock is up by a considerable 6.8% over the past week. However, we decided to pay attention to the company's fundamentals which don't appear to give a clear sign about the company's financial health. Specifically, we decided to study APAC Realty's ROE in this article.
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.
How Do You 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 APAC Realty is:
4.1% = S$6.5m ÷ S$158m (Based on the trailing twelve months to December 2024).
The 'return' is the yearly profit. One way to conceptualize this is that for each SGD1 of shareholders' capital it has, the company made SGD0.04 in profit.
See our latest analysis for APAC Realty
What Has ROE Got To Do With Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. 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.
APAC Realty's Earnings Growth And 4.1% ROE
As you can see, APAC Realty's ROE looks pretty weak. However, when compared to the industry average of 3.1%, we do feel there's definitely more to the company. But then again, seeing that APAC Realty's five year net income shrunk at a rate of 10.0% in the past five years, makes us think again. Bear in mind, the company does have a low ROE. It is just that the industry ROE is lower. Hence, this goes some way in explaining the shrinking earnings.
Next, when we compared with the industry, which has shrunk its earnings at a rate of 0.7% in the same 5-year period, we still found APAC Realty's performance to be quite bleak, because the company has been shrinking its earnings faster than the industry.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if APAC Realty is trading on a high P/E or a low P/E, relative to its industry.