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Singapore Telecommunications (SGX:Z74) has had a great run on the share market with its stock up by a significant 10% over the last three months. We, however wanted to have a closer look at its key financial indicators as the markets usually pay for long-term fundamentals, and in this case, they don't look very promising. In this article, we decided to focus on Singapore Telecommunications' 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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.
How Do You Calculate Return On Equity?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Singapore Telecommunications is:
3.1% = S$755m ÷ S$25b (Based on the trailing twelve months to December 2024).
The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each SGD1 of shareholders' capital it has, the company made SGD0.03 in profit.
Check out our latest analysis for Singapore Telecommunications
What Has ROE Got To Do With 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 Singapore Telecommunications' Earnings Growth And 3.1% 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 9.3%, the ROE figure is pretty disappointing. Thus, the low net income growth of 4.7% seen by Singapore Telecommunications over the past five years could probably be the result of it having a lower ROE.
Next, on comparing with the industry net income growth, we found that Singapore Telecommunications' reported growth was lower than the industry growth of 13% over the last few years, which is not something we like to see.
Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Singapore Telecommunications''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.