Is Venture Corporation Limited’s (SGX:V03) recent performance related to its attractive financial outlook?

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Venture (SGX:V03) stock is up 4.6% over the past week. Given its impressive performance, we decided to study the company’s key financial indicators, as a company’s long-term fundamentals usually dictate market outcomes. In this article, we decided to focus on the ROE of Venture.

Return on equity or ROE is a key metric used to gauge how effectively a company’s management is using the company’s capital. In short, ROE shows the profit that each dollar generates in relation to the investments of its shareholders.

Check out our latest analysis for Venture

How to calculate return on equity?

Return on equity can be calculated using the formula:

Return on equity = Net income (from continuing operations) ÷ Equity

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

12% = $304 million ÷ $2.6 billion (based on trailing 12 months to September 2021).

“Yield” refers to a company’s earnings over the past year. Another way to think about this is that for every 1 SGD worth of equity, the company was able to make a profit of 0.12 SGD.

Why is ROE important for earnings growth?

We have already established that ROE serves as an effective earnings-generating indicator for a company’s future earnings. Based on the share of its profits that the company chooses to reinvest or “keep”, we are then able to assess a company’s future ability to generate profits. Assuming everything else remains unchanged, the higher the ROE and earnings retention, the higher a company’s growth rate compared to companies that don’t necessarily exhibit these characteristics.

A side-by-side comparison of Venture’s earnings growth and 12% ROE

For starters, Venture’s ROE looks acceptable. Even compared to the industry average of 11%, the company’s ROE looks pretty decent. Therefore, this likely laid the foundation for the decent 5.1% growth Venture has seen over the past five years.

We then compared Venture’s net income growth with the industry and we are happy to see that the company’s growth figure is higher compared to the industry which has a growth rate of 3.2% during the same period.

SGX:V03 Past Earnings Growth February 11, 2022

Earnings growth is an important factor in stock valuation. The investor should try to establish whether the expected growth or decline in earnings, as the case may be, is taken into account. This then helps them determine whether the action is placed for a bright or bleak future. Is the V03 well valued? This intrinsic business value infographic has everything you need to know.

Does Venture effectively reinvest its profits?

Although Venture has a median three-year payout ratio of 59% (meaning it retains 41% of earnings), the company has still had good earnings growth in the past, which means its high payout ratio has not hindered its ability to grow.

Additionally, Venture is committed to continuing to share its profits with shareholders, which we infer from its long history of paying dividends for at least ten years. Based on the latest analyst estimates, we found that the company’s future payout ratio over the next three years is expected to remain stable at 64%. As a result, the company’s future ROE is also not expected to change much, with analysts predicting an ROE of 12%.

Conclusion

Overall, we believe Venture’s performance has been quite good. We are particularly impressed with the company’s tremendous earnings growth, which was likely supported by its high ROE. Although the company pays most of its profits in the form of dividends, it was able to increase its profits despite this, so this is probably a good sign. That said, the latest analyst forecasts show that the company will continue to see earnings expansion. For more on the company’s future earnings growth forecast, check out this free analyst forecast report for the company to learn more.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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