Should you be impressed with the ROE from SIA Engineering Company Limited (SGX: S59)?

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<p class = "Canvas-Atom-Canvas-Text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Some investors are already familiar with financial figures from this Article is aimed at those who want to know more about Return on Equity (ROE) and why this is important, and as part of Learning-by-Doing we will look at ROE to gain a better understanding of SIA engineering Company Limited (SGX: S59). "data-reactid =" 27 "> While some investors are already familiar with key financial figures (top hat), this article is aimed at those who want to learn more about return on equity (ROE) and know why this is important In learning-by-doing, we will look at return on investment to better understand SIA Engineering Company Limited (SGX: S59).

<p class = "canvas-atom canvas-text Mb (1,0em) Mb (0) – sm Mt (0,8em) – sm" type = "text" content = "In the last twelve months SIA Engineering posted an ROE of 11%, One way to imagine this is that the company made a profit of SGD0.11 for every SGD1 of equity. "Data-reactid =" 28 "> In the past twelve months SIA Engineering posted an ROE of 11%, One way to present this is for the company to make a profit of SGD0.11 for each SGD1 of equity.

<p class = "canvas-atom canvas-text Mb (1,0em) Mb (0) – sm Mt (0,8em) – sm" type = "text" content = " Read our latest analysis for SIA Engineering "data-reactid =" 29 "> Check out our latest analysis for SIA Engineering

How do I calculate return on equity?

<p class = "canvas-atom canvas-text Mb (1,0em) Mb (0) – sm Mt (0,8em) – sm" type = "text" content = "The Return on equity formula is: "data-reactid =" 31 "> The Return on equity formula is:

Return on equity = net income (from continuing operations) ÷ equity

Or for SIA Engineering:

11% = S $ 169 million ÷ S $ 1.6 billion (based on the last twelve months to September 2019.)

Most people know that the net profit is the total after all expenses, but the concept of equity is a little more complicated. These are all the profits retained by the company plus the capital paid in by the shareholders. The simplest way to calculate equity is to deduct the company's total liabilities from total assets.

What does ROE mean?

<p class = "canvas-atom canvas-text Mb (1,0em) Mb (0) – sm Mt (0,8em) – sm" type = "text" content = "The return on equity measures a company's profitability versus profit It remains in business (plus any capital injections). The return is the annual profit. That is, the higher the ROE, the more profitable the company is. So everything else is the same. Investors should want a high return, It is clear that you can compare different companies with ROE. "Data-reactid =" 37 "> The return on equity measures a company's profitability versus the profit it has made for the company (plus any capital injections). The" return "is the annual profit, ie the higher the ROE, the more profitable is the company. Investors should want a high return, So you can use the return on investment to compare different companies.

Does SIA Engineering have a good return?

An easy way to determine if a company has a good return on equity is to compare it to the industry average. The limitation of this approach is that some companies also differ significantly from others within the same industry classification. As you can see in the graphic below, SIA Engineering has a higher ROE than the average (8.6%) in the infrastructure industry.

SGX: S59 Past Revenue and Net Income, January 4, 2020

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "That is clearly positive. I usually go closer. Check whether a company achieves a better return than comparable companies in the industry Insiders recently bought shares, "data-reactid =" 52 "> This is clearly positive. I usually take a closer look when a company has a better ROE than industry peers. One data point to check is whether Insiders recently bought shares,

How does debt affect equity?

Most companies need money from somewhere to increase their profits. The money can come from the issue of shares, revenue reserves or debts. In the first two cases, the ROE will use this capital for growth. In the latter case, the debt required for growth will increase returns, but will not affect equity. Thus, the use of debt can improve ROE, although, metaphorically speaking, there is an additional risk in stormy weather.

SIA Engineering's debt and 11% ROE

Even though SIA Engineering has a tiny debt with a debt of just 0.01, we consider the use of debt to be very modest. The combination of modest debt and a very respectable ROE suggests that this is a worth seeing business. The economical use of debt to increase the return is often very good for the shareholders. However, this could affect the company's ability to take advantage of future opportunities.

The key to take away

The return on equity is one way to compare the business quality of different companies. In my book, the companies with the highest quality have a high return on equity despite the low level of debt. In general, if two companies have approximately the same leverage and one has a higher return, I would prefer the one with higher return.

<p class = "canvas-atom canvas-text Mb (1,0em) Mb (0) – sm Mt (0,8em) – sm" type = "text" content = "However, ROE is a useful indicator at the right price When buying a stock, there are a number of factors that need to be considered to determine the rate of earnings growth in relation to earnings growth expectations reflected in the current price. You may want to take a look data-rich interactive graphics with forecasts for the company, "data-reactid =" 63 "> Although ROE is a useful indicator of company quality, there are a number of factors you need to consider to determine the right price to buy a stock. Earnings should be proportionate to expectations Earnings growth, which is reflected in the current price, is also increasing.You might want to take a look at this data-rich interactive graph with forecasts for the company.

<p class = "Canvas-Atom Canvas-Text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "If you prefer to check out another company – one with potential superior finances – then don't miss thisfree List of interesting companies with high return on equity and low debt."data-reactid =" 64 "> If you'd rather try another company – one with potentially superior financial data – don't miss thisfree List of interesting companies with high return on equity and low debt.

<p class = "canvas-atom canvas-text Mb (1,0em) Mb (0) – sm Mt (0,8em) – sm" type = "text" content = "If you discover an error that justifies a correction, please contact the editorial team at editorial-team@simplywallst.com, This article from Simply Wall St is general in nature. It is not a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Simply Wall St has no position in the stocks mentioned.

We strive to provide you with long-term, focused research analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or quality material. Thank you for reading."data-reactid =" 65 ">If you discover an error that justifies a correction, please contact the editorial team at editorial-team@simplywallst.com. This article from Simply Wall St is general in nature. It is not a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Simply Wall St has no position in the stocks mentioned.

We strive to provide you with long-term, focused research analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or quality material. Thank you for reading.