Most readers would already know that Food Empire Holdings’ (SGX:F03) stock increased by 4.8% over the past three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Specifically, we decided to study Food Empire Holdings’ ROE in this article.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company’s shareholders.
How Is ROE Calculated?
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 Food Empire Holdings is:
22% = US$60m ÷ US$271m (Based on the trailing twelve months to June 2023).
The ‘return’ is the yearly profit. So, this means that for every SGD1 of its shareholder’s investments, the company generates a profit of SGD0.22.
What Is The Relationship Between ROE And Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company’s future earnings. Depending on how much of these profits the company reinvests or “retains”, and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.
A Side By Side comparison of Food Empire Holdings’ Earnings Growth And 22% ROE
To begin with, Food Empire Holdings has a pretty high ROE which is interesting. Secondly, even when compared to the industry average of 8.6% the company’s ROE is quite impressive. Under the circumstances, Food Empire Holdings’ considerable five year net income growth of 26% was to be expected.
We then performed a comparison between Food Empire Holdings’ net income growth with the industry, which revealed that the company’s growth is similar to the average industry growth of 26% in the same 5-year period.
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. Doing so will help them establish if the stock’s future looks promising or ominous. Is Food Empire Holdings fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is Food Empire Holdings Making Efficient Use Of Its Profits?
Food Empire Holdings has a three-year median payout ratio of 29% (where it is retaining 71% of its income) which is not too low or not too high. By the looks of it, the dividend is well covered and Food Empire Holdings is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.
Besides, Food Empire Holdings has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Upon studying the latest analysts’ consensus data, we found that the company’s future payout ratio is expected to rise to 35% over the next three years. Accordingly, the expected increase in the payout ratio explains the expected decline in the company’s ROE to 17%, over the same period.
Overall, we are quite pleased with Food Empire Holdings’ performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. Having said that, the company’s earnings growth is expected to slow down, as forecasted in the current analyst estimates. 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.
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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.