Unite Group plc (LON: UTG) stock is on a downward trend due to poor financial results?

When you look at Unite Group’s (LON: UTG) recent performance, it’s hard to be excited when its stock is down 5.8% over the past three months. We decided to examine the company’s financials to see if the downward trend will continue as a company’s long-term performance usually dictates market outcomes. In this article, we’ve chosen to focus on the Unite Group’s ROE.

Return on Equity, or ROE, is a test of how effectively a company is increasing its value and managing investors’ money. In simpler terms, it measures a company’s profitability in relation to its equity.

Check out our latest analysis for the Unite Group

How is the ROE calculated?

The return on equity 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 the Unite Group is:

2.5% = £ 84m ÷ £ 3.4b (based on the last 12 months ended June 2021).

The “return” is the profit made over the past twelve months. Another way to imagine this is that for every £ 1 worth of equity, the company was able to make a profit of £ 0.02.

Why is ROE important to earnings growth?

We have already established that ROE is an efficient profitable measure of a company’s future earnings. Based on how much of its profits the company will reinvest or “keep” we can then assess a company’s future ability to generate profits. Assuming all else is equal, companies that have both higher return on equity and higher earnings retention typically have a higher growth rate than companies that do not share the same characteristics.

Unite Group’s earnings growth and 2.5% ROE

It’s hard to argue that Unite Group’s ROE is very good in and of itself. Even compared to the industry average of 9.2%, the ROE is pretty disappointing. Because of this, Unite Group’s five-year net income decline of 44% is unsurprising given the lower ROE. We believe that other aspects could also adversely affect the company’s earnings outlook. For example, that the company has poorly allocated the capital or that the company has a very high payout ratio.

That being said, we benchmarked the Unite Group’s performance against the industry and were concerned to discover that while the company was down in revenue, the industry was up 7.5% over the same period.

Earnings growth is a big factor in stock valuation. Next, investors need to determine whether or not expected earnings growth is already included in the stock price. This then helps them determine whether the stock is placed for a bright or bleak future. Has the market priced in the future prospects for UTG? Find out in our latest intrinsic value infographic research report.

Is the Unite Group using its profits efficiently?

Unite Group has a very high 3-year median payout ratio of 82%, which means it only keeps 18% of its profits. However, it is not uncommon for REITs to have such a high payout ratio, mainly due to legal requirements. This likely explains the company’s declining profits.

Additionally, Unite Group has been paying dividends for at least a decade or more, which suggests management must have realized that shareholders prefer dividends over earnings growth. Our latest analyst data shows that the company’s future payout ratio is projected to be around 80% over the next three years. However, the Unite Group’s ROE is expected to rise to 4.2%, although the payout ratio is not expected to change.

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Overall, we would be thinking about an investment measure in relation to the Unite Group. Given that the company is not reinvesting much in the business, and given the low ROE, it is not surprising that there is no growth in its profits. With that in mind, we’ve examined the latest analyst predictions and found that while the company has shrunk its earnings in the past, analysts expect its earnings to rise in the future. Are these analyst expectations based on general industry expectations or company fundamentals? Click here to go to our analysts forecast page for the company.

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This article from Simply Wall St is of a general nature. We only provide comments based on historical data and analyst projections using an unbiased methodology, and our articles are not intended as financial advice. 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 any of the stocks mentioned.