Are the fundamentals of Ascendas Real Estate Investment Trust (SGX: A17U) sufficient to justify the purchase given the recent weakness in the stock?
It’s hard to get excited after looking at the recent performance of Ascendas Real Estate Investment Trust (SGX: A17U), as its stock fell 5.2% in the past month. However, the fundamentals of the company look pretty decent, and long-term financial data is generally aligned with future market price movements. Specifically, we have decided to study the ROE of Ascendas Real Estate Investment Trust in this article.
Return on equity or ROE is an important factor for a shareholder to consider because it tells them how effectively their capital is being reinvested. In simpler terms, it measures a company’s profitability relative to equity.
Check out our latest review for Ascendas Real Estate Investment Trust
How do you calculate return on equity?
ROE can be calculated using the formula:
Return on equity = Net income (from continuing operations) ÷ Equity
Thus, based on the above formula, the ROE of Ascendas Real Estate Investment Trust is:
5.0% = S $ 457M ÷ S $ 9.2B (based on the last twelve months up to December 2020).
The “return” is the amount earned after tax over the past twelve months. Another way to think about this is that for every SGD 1 worth of equity, the company was able to earn SGD 0.05 in profit.
What does ROE have to do with profit growth?
We have already established that ROE serves as an effective gauge to generate profit for the future profits of a business. Based on how much of that profit the company reinvests or “withholds”, and how effectively it does so, we are then able to assess a company’s profit growth potential. Assuming everything else is equal, companies that have both a higher return on equity and higher profit retention are generally those that have a higher growth rate compared to companies that do not. the same characteristics.
A side-by-side comparison of Ascendas Real Estate Investment Trust’s 5.0% earnings growth and ROE
At first glance, the ROE of Ascendas Real Estate Investment Trust does not look so attractive. However, given that the company’s ROE is similar to the industry average ROE of 4.8%, we can think about it. In contrast, Ascendas Real Estate Investment Trust has experienced moderate growth in net income of 7.6% over the past five years. Considering the fact that the ROE is not particularly high, we believe that there could also be other factors at play that could influence the growth of the company. For example, the business has a low payout rate or is managed efficiently.
Then, comparing Ascendas Real Estate Investment Trust’s net income growth to that of the industry, we found that the reported growth of the company is similar to the industry’s average growth rate of 7.6% over the same period. period.
The basis for attaching value to a business is, to a large extent, related to the growth of its profits. What investors next need to determine is whether the expected earnings growth, or lack thereof, is already built into the share price. By doing this, they will have an idea if the stock is heading for clear blue waters or if swampy waters are ahead of them. Has the market taken into account the future prospects of the A17U? You can find out in our latest Intrinsic Value infographic research report.
Is Ascendas Real Estate Investment Trust Using Profits Efficiently?
Ascendas Real Estate Investment Trust has a high three-year median payout ratio of 82%. This means that he only has 18% of his income left to reinvest in his business. However, it is not unusual to see a REIT with such a high payout ratio primarily due to statutory requirements. Despite this, the company was able to significantly increase its profits, as we saw above.
In addition, Ascendas Real Estate Investment Trust is committed to continuing to share its profits with its shareholders, which we can deduce from its long history of paying dividends 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 reach 103% over the next three years. However, Ascendas Real Estate Investment Trust’s future ROE is expected to increase to 7.4% despite the expected increase in the company’s payout ratio. We infer that other factors could be behind the expected growth of the company’s ROE.
Overall, we think Ascendas Real Estate Investment Trust certainly has some positive factors to consider. While its profit growth is undoubtedly quite substantial, we believe the rate of reinvestment is quite low, which means that the profit growth figure could have been much higher had the company kept a larger part of its profits. That said, the latest forecast from industry analysts shows that the company’s profits are expected to pick up. Are these analyst expectations based on general industry expectations or on company fundamentals? Click here to go to our business analyst’s forecast page.
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