ComfortDelGro (SGX:C52) has had a rough three months with its share price down 8.7%. To decide if this trend could continue, we decided to look at its weak fundamentals as they shape the long-term market trends. Particularly, we will be paying attention to ComfortDelGro's ROE today.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

See our latest analysis for ComfortDelGro

How To Calculate Return On Equity?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for ComfortDelGro is:

7.9% = S$241m ÷ S$3.0b (Based on the trailing twelve months to June 2024).

The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each SGD1 of shareholders' capital it has, the company made SGD0.08 in profit.

What Has ROE Got To Do With 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 ComfortDelGro's Earnings Growth And 7.9% ROE

When you first look at it, ComfortDelGro's ROE doesn't look that attractive. However, its ROE is similar to the industry average of 8.8%, so we won't completely dismiss the company. But ComfortDelGro saw a five year net income decline of 6.0% over the past five years. Remember, the company's ROE is a bit low to begin with. So that's what might be causing earnings growth to shrink.

However, when we compared ComfortDelGro's growth with the industry we found that while the company's earnings have been shrinking, the industry has seen an earnings growth of 20% in the same period. This is quite worrisome.

SGX:C52 Past Earnings Growth February 8th 2025

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. Is C52 fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is ComfortDelGro Efficiently Re-investing Its Profits?

ComfortDelGro's declining earnings is not surprising given how the company is spending most of its profits in paying dividends, judging by its three-year median payout ratio of 73% (or a retention ratio of 27%). With only a little being reinvested into the business, earnings growth would obviously be low or non-existent.

Moreover, ComfortDelGro has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 80%. As a result, ComfortDelGro's ROE is not expected to change by much either, which we inferred from the analyst estimate of 9.2% for future ROE.

Conclusion

In total, we would have a hard think before deciding on any investment action concerning ComfortDelGro. As a result of its low ROE and lack of much reinvestment into the business, the company has seen a disappointing earnings growth rate. With that said, we studied the latest analyst forecasts and found that while the company has shrunk its earnings in the past, analysts expect its earnings to grow in the future. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.