Return on equity (ROE) is a simple metric to showcase how good a company’s management is in turning every dollar of shareholders’ equity into earnings. It’s calculated by taking the annual earnings of a company (found under its income statement) and dividing it by the shareholders’ equity (found under the balance sheet). Generally, the higher the ROE figure, the better it is for shareholders. We all want the companies we’ve invested in to generate as much profit as possible for every dollar of our equity, don’t we?
A recent report by the Singapore Exchange revealed the ROE of the top 10 largest industrials shares of the Straits Times Index (SGX: ^STI). The first five shares out of the 10 with the highest ROEs are:
- Singapore Technologies Engineering Ltd (SGX: S63) — (ROE of 22.2%)
- Venture Corporation Ltd (SGX: V03) — (16.4%)
- SATS Ltd (SGX: S58) — (15.1%)
- Yangzijiang Shipbuilding Holdings Ltd (SGX: BS6) — (13.2%)
- ComfortDelgro Corporation Ltd (SGX: C52) — (11.6%)
The above companies have an average ROE of 15.7%, and the average ROE of the 10 companies is at 11%.
From the list above, let’s take a closer look at Singapore Technologies Engineering (ST Engineering), Venture, and SATS.
ST Engineering is an engineering conglomerate with businesses in the aerospace, electronics, land systems, and marine sectors. Over the past five years, the group averaged a ROE of 23.5%. It managed to produce a year-to-date (as of 16 August 2019) total return of 18.8% and a three-year total return of 37.9%. With a market capitalisation of above S$12 billion, it is the largest company among the top five shares.
Venture is a global electronics services provider. The company had an average ROE of 11.3% in the last five years. Year to date, it produced a total return of 12.4%, but on a three-year basis, its total return jumps up to 82.2%, the best among the 10 companies.
SATS is the chief ground-handling and in-flight catering service provider at Singapore Changi Airport. Besides its operations in Singapore, the company also has an established network in Asia through various joint ventures. SATS had an average ROE of 15.3% over the last five years. Total return wise, its year-to-date figure loses out to those of ST Engineering and Venture, coming in at just 4.2%. Its three-year return is also a not-impressive 8.9%.
The Foolish takeaway
Companies with superior ROEs tend to do better than those with lower ROEs over the long term. A word of caution, though: ROE can be artificially inflated when a company takes on more debt. Therefore, investors who identify companies with high ROEs such as the above should dig deeper to see if they have more debt than they can handle.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. The Motley Fool Singapore has recommended shares of Singapore Exchange and SATS. Motley Fool Singapore contributor Sudhan P owns shares in Singapore Exchange and SATS.
Motley Fool Singapore 2019