Yahoo Finance With An ROE Of 5.68%, Has City Developments Limited’s (SGX:C09) Management Done Well?
This analysis is intended to introduce important early concepts to people who are starting to invest and want to better understand how you can grow your money by investing in City Developments Limited (SGX:C09).
City Developments Limited (SGX:C09) generated a below-average return on equity of 5.68% in the past 12 months, while its industry returned 6.62%. Though C09’s recent performance is underwhelming, it is useful to understand what ROE is made up of and how it should be interpreted. Knowing these components can change your views on C09’s below-average returns. I will take you through how metrics such as financial leverage impact ROE which may affect the overall sustainability of C09’s returns. Check out our latest analysis for City Developments
What you must know about ROE
Return on Equity (ROE) is a measure of City Developments’s profit relative to its shareholders’ equity. It essentially shows how much the company can generate in earnings given the amount of equity it has raised. While a higher ROE is preferred in most cases, there are several other factors we should consider before drawing any conclusions.
Return on Equity = Net Profit ÷ Shareholders Equity
ROE is measured against cost of equity in order to determine the efficiency of City Developments’s equity capital deployed. Its cost of equity is 8.51%. This means City Developments’s returns actually do not cover its own cost of equity, with a discrepancy of -2.83%. This isn’t sustainable as it implies, very simply, that the company pays more for its capital than what it generates in return. ROE can be broken down into three different ratios: net profit margin, asset turnover, and financial leverage. This is called the Dupont Formula:
Dupont Formula
ROE = profit margin × asset turnover × financial leverage
ROE = (annual net profit ÷ sales) × (sales ÷ assets) × (assets ÷ shareholders’ equity)
ROE = annual net profit ÷ shareholders’ equity
Basically, profit margin measures how much of revenue trickles down into earnings which illustrates how efficient the business is with its cost management. The other component, asset turnover, illustrates how much revenue City Developments can make from its asset base. And finally, financial leverage is simply how much of assets are funded by equity, which exhibits how sustainable the company’s capital structure is. Since ROE can be inflated by excessive debt, we need to examine City Developments’s debt-to-equity level. The debt-to-equity ratio currently stands at a low 39.19%, meaning City Developments still has headroom to borrow debt to increase profits.
Next Steps:
ROE is a simple yet informative ratio, illustrating the various components that each measure the quality of the overall stock. City Developments’s ROE is underwhelming relative to the industry average, and its returns were also not strong enough to cover its own cost of equity. Although, its appropriate level of leverage means investors can be more confident in the sustainability of City Developments’s return with a possible increase should the company decide to increase its debt levels. ROE is a helpful signal, but it is definitely not sufficient on its own to make an investment decision.
For City Developments, there are three essential aspects you should further research:
Financial Health: Does it have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
Valuation: What is City Developments worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether City Developments is currently mispriced by the market.
Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of City Developments? Explore our interactive list of stocks with large growth potential to get an idea of what else is out there you may be missing!
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.
