Has Sheng Siong Group Ltd's (SGX:OV8) Impressive Stock Performance Got Anything to Do With Its Fundamentals?
Sheng Siong Group (SGX:OV8) has had a great run on the share market with its stock up by a significant 24% over the last three months. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. Particularly, we will be paying attention to Sheng Siong Group'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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
How Do You Calculate Return On Equity?
ROE can be calculated by using the formula:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Sheng Siong Group is:
26% = S$145m ÷ S$558m (Based on the trailing twelve months to September 2025).
The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every SGD1 worth of equity, the company was able to earn SGD0.26 in profit.
View our latest analysis for Sheng Siong Group
Why Is ROE Important For Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. 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. 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.
Sheng Siong Group's Earnings Growth And 26% ROE
To begin with, Sheng Siong Group has a pretty high ROE which is interesting. Second, a comparison with the average ROE reported by the industry of 9.4% also doesn't go unnoticed by us. Given the circumstances, we can't help but wonder why Sheng Siong Group saw little to no growth in the past five years. We reckon that there could be some other factors at play here that's limiting the company's growth. These include low earnings retention or poor allocation of capital
As a next step, we compared Sheng Siong Group's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 10% in the same period.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Sheng Siong Group is trading on a high P/E or a low P/E, relative to its industry.
Is Sheng Siong Group Making Efficient Use Of Its Profits?
With a high three-year median payout ratio of 70% (implying that the company keeps only 30% of its income) of its business to reinvest into its business), most of Sheng Siong Group's profits are being paid to shareholders, which explains the absence of growth in earnings.
Moreover, Sheng Siong Group 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. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 71%. As a result, Sheng Siong Group's ROE is not expected to change by much either, which we inferred from the analyst estimate of 26% for future ROE.
Summary
In total, it does look like Sheng Siong Group has some positive aspects to its business. However, while the company does have a high ROE, its earnings growth number is quite disappointing. This can be blamed on the fact that it reinvests only a small portion of its profits and pays out the rest as dividends. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.
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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.