Return on Equity of STI stocks

The Straits Times Index (SGX:^STI) has generated a year to date total return of 7.2%. This total return is made up of price performance in addition to reinvested dividends. An alternative way to present the performance of the Index is to consider its financial performance with a ratio such as its Return on Equity (ROE).

The ROE for the STI is 10.2% over the past 12 months. This means for every dollar of a common share invested in the constituents of the STI, the financial return came to 10.2%. Or expressed in another way,a basket of appropriately weighted 30 STI stocks would have generated just over 10 cents of net income for every one dollar invested.

The ratio is thus more focused on the profitability of the index constituents, rather than a price multiple. This ratio makes use of two key aspects of a stock – the net income generated by the company (the return) and the value of the common shareholdings of the company (the equity), over the same periods of time. The 10.2% STI ROE is between that of the Nikkei 225 and the Hang Seng Index at 8.0% and 13.8% respectively.

Example – Ascendas REIT

Ascendas Real Estate Investment Trust (SGX:A17U) is the most recent constituent to join the STI. According to Bloomberg data, the ROE of Ascendas REIT is 9.12%. This was based on the most recent four quarters of reported net income at S$436.8 million, divided by an average value of the total equity of S$4791.4 million. In the case of REITs, net income is defined as net profits after all expenses have been deducted. Expenses include the effects of discontinued operations, accounting standard changes, natural disasters, other extraordinary items and early extinguishment of debt.

The value of the total equity can change over a year. Thus, an average measure of the total equity is commonly used for a general indication of ROE. The value of the total equity recorded in the June 2014 quarter was S$4,845.4 million and the total equity recorded in the June 2013 quarter was S$4,737.4.

Hence, using the formula:

ROE = Trailing 12 month net income available to common shareholders/ Average of the beginning balance and ending balance of total common equity

ROE = [S$436.8 million/ [(S$4845.4 million + S$4737.4 million)/2]]*100

ROE = (S$436.8 million/S$4791.4 million)*100

ROE = 9.12

This means that on an average basis for every dollar invested in Ascendas REIT for the period from April 2013 to April 2014, there was around 9 cents of income generated for the 12 months.

The table below details the ROE ratios for the 30 STI constituent stocks, sort alphabetically. The median ROE for the last 12 months is 11.1, compared to a median of 11.7 for the preceding 12 months. This compares to the weighted average of 10.2 mentioned earlier.

Short Name SGX Code Market Cap: S$B ROE:Y ROE:Y-1 ROE:Y-2 Px Chg Pct YTD (%) Dvd Ind Yld (%)
ASCENDAS REAL ES A17U 5.5 9.1 7.8 13.7 1.8 6.3
CAPITALAND LTD C31 13.8 5.7 6.2 7.3 8.3 2.4
CAPITAMALL TRUST C38U 6.7 10.4 9.8 7.5 1.3 5.6
CITY DEVELOPS C09 8.8 8.1 9.9 12.6 1.4 0.8
COMFORTDELGRO CO C52 5.3 12.9 12.7 12.7 23.9 3.1
DBS GROUP HLDGS D05 44.8 11.8 12.6 10.9 6 3.2
GENTING SINGAPOR G13 13.8 10 10.7 18.2 -25.1 0.9
GLOBAL LOGISTIC MC0 13.5 7.5 8.5 7.5 -3.1 1.6
GOLDEN AGRI-RESO E5H 6.5 3.3 4.9 17.1 -7.3 2.2
HONGKONG LAND H78 20.6 4.3 5.7 24 18.5 2.6
HUTCHISON PORT-U NS8U 7.7 2.8 3.3  N/A 4 6.9
JARDINE CYCLE & C07 15.5 19.6 21.8 25.3 21.6 3.1
JARDINE MATHESON J36 54.2 8.6 9.8 22.9 19.7 2.3
JARDINE STRAT J37 51.7 7.7 8.9 21.9 13.7 0.7
KEPPEL CORP LTD BN4 19.2 19.9 26.4 27.6 -5.7 4
NOBLE GROUP LTD N21 9.6 6.9 10.1 10.1 33.2 0.8
OCBC BANK O39 38.5 13.6 17.8 11.2 -0.4 3.4
OLAM INTERNATION O32 6.2 16.0 11.1 13.8 65.5 2.0
SEMBCORP INDUS U96 9.3 17.5 17.5 20.4 -5.6 1.0
SEMBCORP MARINE S51 7.9 21.6 22.2 30 -14.8 2.9
SIA ENGINEERING S59 5.1 17.8 21.1 21.1 -8.7 4.3
SINGAP PRESS HLG T39 6.7 9.4 19.4 17.4 1.5 3.6
SINGAP TECH ENG S63 11.4 29.6 31.5 31.1 -7.8 2.2
SINGAPORE AIRLIN C6L 11.7 2.0 2.9 2.5 -4.1 2.1
SINGAPORE EXCH S68 7.7 35.4 39 35.2 -0.7 3.9
SINGAPORE TELECO Z74 59.9 14.2 14.8 16.7 3.8 4.4
STARHUB LTD CC3 7.1 431.5 1087.1 823.8 -3.7 4.8
THAI BEVERAGE Y92 18.5 24.2 40.4 20.7 34.3 2.2
UNITED OVERSEAS U11 36 1.02 12.3 11.1 6.3 3.1
WILMAR INTERNATI F34 20.1 7.5 9.1 12.7 -8.8 2.4

Source: Bloomberg (data as of 19 September 2014)

Note as shown in the table above, StarHub Ltd (SGX:CC3) has maintained a relatively high ROE over the past three years. This is because the StarHub Group’s total common equity in the June 2014 quarter and the June 2013 quarter was relatively small at S$94.5 million and S$82.7 million. The StarHub Group shareholders’ equity is lower than that at StarHub’s Company level due to the adoption of merger accounting in July 2002 when the shares of Singapore Cable Vision (SCV) were acquired and consolidated into the StarHub Group.

ROE Applications

ROE simply measures profitability of the company given the average outstanding common shareholders’ equity. There can be different definitions of the ratio, for instance S&P Capital IQ which sources the information on the SGX StockFacts page calculates ROE by dividing earnings from continuing operations by the average of total equity over the period.

ROE can be an important ratio for investors because it can provide a general measure of how effectively a company or trust uses its equity or funds contributed by shareholders to generate profits. This ratio combines information from the balance sheet and income statement on a quarterly or annual basis. Comparing across companies the same business sector, investors can evaluate the company’s or trust’s ability to generate net income from their invested shareholders’ equity.

Note that ROE is a retrospective ratio and high ROE does not mean the company is doing well overall. Investors should also do their own due diligence to sieve out any forms of extraordinary incomes that may skew the ROE ratios before making any informed investment decisions.

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