It is hard to get excited after looking at Ascendas Real Estate Investment Trust’s (SGX:A17U) recent performance, when its stock has declined 5.2% over the past month. However, the company’s fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. Specifically, we decided to study Ascendas Real Estate Investment Trust’s ROE in this article.
Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In simpler terms, it measures the profitability of a company in relation to shareholder’s equity.
View our latest analysis for Ascendas Real Estate Investment Trust
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 Ascendas Real Estate Investment Trust is:
5.0% = S$457m ÷ S$9.2b (Based on the trailing twelve months to December 2020).
The ‘return’ is the amount earned after tax over the last twelve months. Another way to think of that is that for every SGD1 worth of equity, the company was able to earn SGD0.05 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. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don’t have the same features.
A Side By Side comparison of Ascendas Real Estate Investment Trust’s Earnings Growth And 5.0% ROE
When you first look at it, Ascendas Real Estate Investment Trust’s ROE doesn’t look that attractive. However, given that the company’s ROE is similar to the average industry ROE of 4.8%, we may spare it some thought. On the other hand, Ascendas Real Estate Investment Trust reported a moderate 7.6% net income growth over the past five years. Taking into consideration that the ROE is not particularly high, we reckon that there could also be other factors at play which could be influencing the company’s growth. For instance, the company has a low payout ratio or is being managed efficiently.
Next, on comparing Ascendas Real Estate Investment Trust’s net income growth with the industry, we found that the company’s reported growth is similar to the industry average growth rate of 7.6% 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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Has the market priced in the future outlook for A17U? You can find out in our latest intrinsic value infographic research report.
Is Ascendas Real Estate Investment Trust Making Efficient Use Of Its Profits?
Ascendas Real Estate Investment Trust has a high three-year median payout ratio of 82%. This means that it has only 18% of its income left to reinvest into its business. However, it’s not unusual to see a REIT with such a high payout ratio mainly due to statutory requirements. In spite of this, the company was able to grow its earnings by a fair bit, as we saw above.
Moreover, Ascendas Real Estate Investment Trust is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Looking at the current analyst consensus data, we can see that the company’s future payout ratio is expected to rise to 103% over the next three years. However, Ascendas Real Estate Investment Trust’s future ROE is expected to rise to 7.4% despite the expected increase in the company’s payout ratio. We infer that there could be other factors that could be driving the anticipated growth in the company’s ROE.
Overall, we feel that Ascendas Real Estate Investment Trust certainly does have some positive factors to consider. While no doubt its earnings growth is pretty substantial, we do feel that the reinvestment rate is pretty low, meaning, the earnings growth number could have been significantly higher had the company been retaining more of its profits. 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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