With its stock down 2.8% over the past month, it is easy to disregard Keppel (SGX:BN4). 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 Keppel’s ROE.
Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
View our latest analysis for Keppel
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 Keppel is:
7.6% = S$872m ÷ S$11b (Based on the trailing twelve months to June 2023).
The ‘return’ is the yearly profit. Another way to think of that is that for every SGD1 worth of equity, the company was able to earn SGD0.08 in profit.
Why Is ROE Important For 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.
Keppel’s Earnings Growth And 7.6% ROE
On the face of it, Keppel’s ROE is not much to talk about. Next, when compared to the average industry ROE of 9.8%, the company’s ROE leaves us feeling even less enthusiastic. Keppel was still able to see a decent net income growth of 14% over the past five years. So, the growth in the company’s earnings could probably have been caused by other variables. For instance, the company has a low payout ratio or is being managed efficiently.
We then performed a comparison between Keppel’s net income growth with the industry, which revealed that the company’s growth is similar to the average industry growth of 14% in the same 5-year period.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. 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 Keppel is trading on a high P/E or a low P/E, relative to its industry.
Is Keppel Efficiently Re-investing Its Profits?
With a three-year median payout ratio of 49% (implying that the company retains 51% of its profits), it seems that Keppel is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that’s well covered.
Besides, Keppel has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 57%. As a result, Keppel’s ROE is not expected to change by much either, which we inferred from the analyst estimate of 8.7% for future ROE.
Summary
Overall, we feel that Keppel certainly does have some positive factors to consider. Even in spite of the low rate of return, the company has posted impressive earnings growth as a result of reinvesting heavily into its business. Having said that, the company’s earnings growth is expected to slow down, as forecasted in the current analyst estimates. Are these analysts expectations based on the broad expectations for the industry, or on the company’s fundamentals? Click here to be taken to our analyst’s forecasts page for the company.
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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.
