$SIA (C6L.SG)$ stock is up by 4.1% over the past month.   Given that the stock prices usually follow long-term business performance, we wonder if the company's mixed financials could have any adverse effect on its current price price movement      In this article, we decided to focus on Singapore Airlines'  ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors' money.  Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for Singapore Airlines

How Is ROE Calculated?

The formula for return on equity is:

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

So, based on the above formula, the ROE for Singapore Airlines is:

3.5% = S$816m ÷ S$24b (Based on the trailing twelve months to September 2022).

The 'return' is the income the business earned over the last year.  Another way to think of that is that for every SGD1 worth of equity, the company was able to earn SGD0.03 in profit.

What Has ROE Got To Do With 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.  Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don't share these attributes.

Singapore Airlines' Earnings Growth And 3.5% ROE

It is hard to argue that Singapore Airlines' ROE is much good in and of itself.   Not just that, even compared to the industry average of 18%, the company's ROE is entirely unremarkable.   For this reason, Singapore Airlines' five year net income decline of 43% is not surprising given its lower ROE.  However, there could also be other factors causing the earnings to decline.  For instance, the company has a very high payout ratio, or is faced with competitive pressures.

As a next step, we compared Singapore Airlines' performance with the industry and found thatSingapore Airlines' performance is depressing even when compared with the industry, which has shrunk its earnings at a rate of 8.5% in the same period, which is a slower than the company.

SGX:C6L Past Earnings Growth November 7th 2022

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.    Is Singapore Airlines fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Singapore Airlines Efficiently Re-investing Its Profits?

Singapore Airlines doesn't pay any dividend, meaning that potentially all of its profits are being reinvested in the business, which doesn't explain why the company's earnings have shrunk if it is retaining all of its profits.  It looks like there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.

Summary

On the whole, we feel that the performance shown by Singapore Airlines can be open to many interpretations.      Even though it appears to be retaining most of its profits, given the low ROE, investors may not be benefitting from all that reinvestment after all. The low earnings growth suggests our theory correct.       That being so, the latest industry analyst forecasts show that analysts are forecasting a slight improvement in the company's future earnings growth.  This could offer some relief to the company's existing shareholders.     To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.