CapitaLand Integrated Commercial Trust (SGX:C38U) has had a rough month with its share price down 3.1%. However, stock prices are usually driven by a company's financials over the long term, which in this case look pretty respectable. Particularly, we will be paying attention to CapitaLand Integrated Commercial Trust's ROE today.

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. Put another way, it reveals the company's success at turning shareholder investments into profits.

See our latest analysis for CapitaLand Integrated Commercial Trust

How Is ROE Calculated?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for CapitaLand Integrated Commercial Trust is:

7.9% = S$1.1b ÷ S$14b (Based on the trailing twelve months to December 2021).

The 'return' is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each SGD1 of shareholders' capital it has, the company made 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. 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 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.

CapitaLand Integrated Commercial Trust's Earnings Growth And 7.9% ROE

On the face of it, CapitaLand Integrated Commercial Trust's ROE is not much to talk about. Yet, a closer study shows that the company's ROE is similar to the industry average of 6.8%. On the other hand, CapitaLand Integrated Commercial Trust reported a moderate 5.2% net income growth over the past five years. Taking into consideration that the ROE is not particularly high, we reckon that there could also be other factors at play which could be influencing the company's growth. Such as - high earnings retention or an efficient management in place.

Next, on comparing with the industry net income growth, we found that the growth figure reported by CapitaLand Integrated Commercial Trust compares quite favourably to the industry average, which shows a decline of 3.3% in the same period.

Earnings growth is an important metric to consider when valuing a stock. 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. Is C38U fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is CapitaLand Integrated Commercial Trust Making Efficient Use Of Its Profits?

CapitaLand Integrated Commercial Trust has a high three-year median payout ratio of 86%. This means that it has only 14% of its income left to reinvest into its business. However, it's not unusual to see a REIT with such a high payout ratio mainly due to statutory requirements. In spite of this, the company was able to grow its earnings by a fair bit, as we saw above.

Moreover, CapitaLand Integrated Commercial Trust is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to rise to 104% over the next three years. Consequently, the higher expected payout ratio explains the decline in the company's expected ROE (to 5.9%) over the same period.

Conclusion

On the whole, we do feel that CapitaLand Integrated Commercial Trust has some positive attributes. While no doubt its earnings growth is pretty substantial, we do feel that the reinvestment rate is pretty low, meaning, the earnings growth number could have been significantly higher had the company been retaining more of its profits. Having said that, on studying current analyst estimates, we were concerned to see that while the company has grown its earnings in the past, analysts expect its earnings to shrink in the future. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts 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.