Is Residential Secure Income plc (LON:RESI)’s Recent Price Action Underpinned By Its Weak Fundamentals?

With the stock down 13% over the past week, Residential Secure Income (LON:RESI) is easy to overlook. It’s possible that the markets have ignored the company’s disparate financial metrics and decided to adjust to the negative sentiment. Fundamentals usually dictate market outcomes, so it makes sense to study the company’s financials. In particular, we decided to examine the ROE of Residential Secure Income in this article.

ROE, or return on equity, is a useful tool for assessing how effectively a company is generating returns on the investment received from its shareholders. In other words, it shows the company’s success in turning shareholders’ investments into profits.

Check out our latest analysis for Residential Secure Income

How do you calculate return on equity?

The ROE can be calculated using the following formula:

Return on Equity = Net Income (from continuing operations) ÷ Equity

So, based on the formula above, the ROE for Residential Secure Income is:

7.3% = UK£15m ÷ UK£201m ​​(Based on trailing 12 months to March 2022).

“Yield” refers to a company’s profits over the past year. This means that for every £1 of equity the company makes £0.07 of profit.

What does ROE have to do with earnings growth?

We have already established that ROE serves as an efficient profitable measure of a company’s future profits. We now need to evaluate how much profit the company is reinvesting or “keeping” for future growth, which then gives us an idea of ​​the company’s growth potential. Assuming all else remains the same, the higher the ROE and earnings retention, the higher a company’s growth rate compared to companies that don’t necessarily exhibit these characteristics.

Residential Secure Income earnings growth and 7.3% ROE

At first glance, Residential Secure Income’s ROE doesn’t look particularly attractive. Next, the company’s ROE leaves us even less excited compared to the industry average ROE of 13%. However, the modest 16% net income growth that Residential Secure Income has seen over the past five years is definitely positive. We assume that other factors could play a role here. Such as – a high accumulation of profits or efficient management.

We then compared Residential Secure Income’s net income growth to that of the industry and are pleased to note that the company’s growth number compares favorably to the industry, which has a growth rate of 9.9% over the same period.

Much of the basis for increasing the value of a company is tied to its earnings growth. Next, investors need to determine whether expected earnings growth, or lack of it, is already embedded in the stock price. This allows them to determine if the stock’s future looks bright or ominous. A good indicator of expected earnings growth is P/E, which determines the price the market is willing to pay for a stock based on its earnings prospects. So you should check whether Residential Secure Income is trading at a high P/E or low P/E relative to its industry.

Is Residential Secure Income efficiently reinvesting its profits?

The really high three-year median payout ratio of 113% for Residential Secure Income suggests the company is paying its shareholders more than it earns. However, as we’ve already seen, this hasn’t really hampered its ability to grow. It’s still worth keeping an eye on that high payout ratio if, for whatever reason, the company runs into trouble and business takes a hit. You can see the 4 risks we have identified for Residential Secure Income by visiting our Risk Dashboard for free on our platform here.

In addition, Residential Secure Income has paid dividends over a five-year period. This shows that the company has an obligation to share profits with its shareholders. Based on the latest analyst estimates, we’ve found that the company’s future payout ratio is likely to remain steady at 94% for the next three years.

summary

Overall, we think Residential Secure Income’s performance is open to many interpretations. While the company has posted impressive earnings growth, its poor ROE and low earnings retention make us question whether that growth could sustain if the company happens to be exposed to any risks. However, as projected by the latest analyst estimates, the company’s earnings growth is likely to slow. To learn more about the company’s future earnings growth projections, take a look free Report on analyst forecasts for the company to learn more.

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This Simply Wall St article is of a general nature. We provide comments based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended as financial advice. It is not a recommendation to buy or sell any stock and does not take into account your goals or financial situation. Our goal is to offer you long-term focused analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any of the stocks mentioned.