Yahoo Finance Union Gas Holdings Limited's (SGX:1F2) Stock On An Uptrend: Could Fundamentals Be Driving The Momentum?
Union Gas Holdings' (SGX:1F2) stock is up by a considerable 5.3% over the past week. As most would know, fundamentals are what usually guide market price movements over the long-term, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. In this article, we decided to focus on Union Gas Holdings' ROE.
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 Union Gas Holdings
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 Union Gas Holdings is:
18% = S$12m ÷ S$69m (Based on the trailing twelve months to December 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 SGD0.18.
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 everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.
Union Gas Holdings' Earnings Growth And 18% ROE
To begin with, Union Gas Holdings seems to have a respectable ROE. Further, the company's ROE compares quite favorably to the industry average of 11%. Despite this, Union Gas Holdings' five year net income growth was quite flat over the past five years. We reckon that there could be some other factors at play here that's limiting the company's growth. For example, it could be that the company has a high payout ratio or the business has allocated capital poorly, for instance.
As a next step, we compared Union Gas Holdings' net income growth with the industry and discovered that the industry saw an average growth of 7.7% in the same period.
Earnings growth is a huge factor in stock valuation. 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 1F2 fairly valued? This infographic on the company's intrinsic value has everything you need to know.
Is Union Gas Holdings Efficiently Re-investing Its Profits?
Despite having a normal three-year median payout ratio of 35% (implying that the company keeps 65% of its income) over the last three years, Union Gas Holdings has seen a negligible amount of growth in earnings as we saw above. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.
Additionally, Union Gas Holdings has paid dividends over a period of six years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth.
Summary
In total, it does look like Union Gas Holdings has some positive aspects to its business. However, given the high ROE and high profit retention, we would expect the company to be delivering strong earnings growth, but that isn't the case here. This suggests that there might be some external threat to the business, that's hampering its growth. So far, we've only made a quick discussion around the company's earnings growth. You can do your own research on Union Gas Holdings and see how it has performed in the past by looking at this FREE detailed graph of past earnings, revenue and cash flows.
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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.
