Custodian REIT (LON: CREI) stock is up 4.5% in the past three months. However, the weak financial performance indicators make us doubt whether this trend could continue. Specifically, we have decided to study Custodian REITs ROE in this article.
Return on Equity, or ROE, is a test of how effectively a company is increasing its value and managing investors’ money. In other words, it’s a profitability metric that measures the return on the capital provided by the company’s shareholders.
Check out our latest analysis for the Custodian REIT
How do you calculate the return on equity?
The return on equity can be calculated using the following formula:
Return on Equity = Net Income (from continuing operations) Ã· Equity
So, based on the formula above, the ROE for the custodian REIT is:
0.9% = UK Â£ 3.7m Â£ 410m UK Â£ (based on the last 12 months through March 2021).
The “return” is the annual profit. So that means that for every Â£ 1 of its shareholder’s investment, the company will make a profit of Â£ 0.01.
Why is ROE important to earnings growth?
So far we have learned that ROE is a measure of a company’s profitability. Based on how much of its profits the company will reinvest or “keep”, we can then evaluate a company’s future ability to generate profits. Assuming everything else stays the same, the higher the rate of growth of a company compared to companies that do not necessarily have these characteristics, the higher the ROE and earnings retention.
A side-by-side comparison of earnings growth and 0.9% ROE of the custodian REIT
It’s hard to argue that the Custodian REIT’s ROE is very good in and of itself. Even compared to the industry average of 7.9%, the ROE is pretty disappointing. Given the circumstances, the sharp drop in net income of 29% for the custodian REIT over the past five years is unsurprising. However, there could also be other factors that are causing a decrease in earnings. For example – low profit retention or poor capital allocation.
That being said, we benchmarked Custodian REIT’s performance against the industry and were concerned to discover that while the company was shrinking profits, the industry was up 12% over the same period.
The basis for increasing the value of a company is largely linked to its earnings development. The investor should try to figure out whether it is pricing in expected growth or decline in earnings, whatever the case. That way, they’ll have an idea of ââwhether the stock is getting into clear blue water or expecting boggy water. Is CREI rated fairly? These Infographic on the intrinsic value of the company has everything you need to know.
Is the custodian REIT reinvesting its profits efficiently?
The custodian REIT appears to be paying out most of its earnings as dividends, based on its 3-year median payout ratio of 99% (that is, the company only keeps 1.3% of profits). However, this is typical of REITs as they are often required by law to distribute the majority of their income. Accordingly, this should explain why revenues have declined.
Additionally, the custodian REIT has been paying dividends for seven years, which is a considerable amount of time, suggesting management must have realized that despite declining profits, shareholders prefer constant dividends. Studying the latest analyst consensus data, we found that the company is projected to continue to distribute around 92% of its earnings over the next three years.
Overall, the performance of the Custodian REIT is quite a disappointment. With the company not reinvesting much in the business, and given the low ROE, it is not surprising that there is no growth in its profits. So far, we’ve only touched the surface of the company’s past performance by looking at the company’s fundamentals. You can do your own research on the Custodian REIT and see how it has performed in the past by checking out this FREE one detailed graphic past earnings, sales and cash flows.
This article from Simply Wall St is of a general nature. It is not a recommendation to buy or sell stocks and does not take into account your goals or your financial situation. Our goal is to provide you with long-term, focused analysis based on fundamentals. Note that our analysis may not take into account the latest company announcements or quality material, which may be sensitive to the price. Simply Wall St has no position in the stocks mentioned.
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