Are Axis Real Estate Investment Trust’s (KLSE:AXREIT) Fundamentals Good Enough to Warrant Buying Given The Stock’s Recent Weakness?
Axis Real Estate Investment Trust (KLSE: AXREIT) had to contend with a price decline of 3.7% for about three months. However, if you look carefully, you might find that key financial indicators look pretty decent, which could mean the stock has the potential to go up in the long run, as markets typically reward more resilient long-term fundamentals. In this article, we’ve decided to focus on the ROE of the Axis Real Estate Investment Trust.
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 is a profitability metric that measures the return on the capital provided by the company’s shareholders.
Check out our latest analysis for Axis Real Estate Investment Trust
How to calculate the return on equity
The Formula for ROE is:
Return on Equity = Net Income (from continuing operations) ÷ Equity
So, based on the formula above, the ROE for Axis Real Estate Investment Trust is:
10% = RM220m ÷ RM2.1b (based on the last twelve months up to September 2020).
The “return” is the amount earned after tax over the past twelve months. One way to conceptualize this is for the company to make a profit of MYR0.10 for every MYR1 of shareholder equity.
Why is ROE important to earnings growth?
We have already established that ROE is an efficient profit factor for a company’s future profits. Depending on how much of those profits the company reinvests or “retains” and how effectively this is done, we can then assess a company’s earnings growth potential. In general, all other things being equal, companies with high ROE and profit sharing will have a higher rate of growth than companies that do not share these characteristics.
Earnings growth and 10% ROE from Axis Real Estate Investment Trust
At first glance, the Axis Real Estate Investment Trust’s ROE doesn’t look very promising. However, the fact that the ROE is well above the industry average of 3.9% does not go unnoticed to us. This certainly adds some context to the moderate 17% net income growth of Axis Real Estate Investment Trust over the past five years. Apart from that, the company initially has a slightly low ROE, only that it is above the industry average. The earnings growth could therefore also be due to other factors. For example, a high profit retention or the company that belongs to a high-growth industry.
When you consider that industry profits are down 9.1% over the same period, the growth in the company’s net income is pretty remarkable.
KLSE: AXREIT Past Earnings Growth December 13, 2020
The foundation of a company’s value creation is largely tied to profit growth. Next, investors need to determine whether or not the expected earnings growth is already built into the stock price. That way, they can determine if the future of the stock is promising or threatening. If you’re wondering about the Axis Real Estate Investment Trust’s rating, check out this measure of value for money versus the industry.
Is Axis Real Estate Investment Trust reinvesting its profits efficiently?
The Axis Real Estate Investment Trust has a high average payout ratio of 64% over three years. This means that only 36% of his income is left to reinvest in his business. However, it’s not uncommon to see a REIT with such a high payout ratio, largely due to legal requirements. Even so, the company’s earnings grew moderately, as we saw above.
In addition, the Axis Real Estate Investment Trust has been paying dividends for at least ten years or more. This shows that the company has an obligation to share profits with its shareholders. Our latest analyst data shows the company’s future payout ratio is projected to climb to 103% over the next three years. Regardless of this, it is expected that the ROE for the company will not change significantly despite the higher expected payout ratio.
Overall, we believe that the Axis Real Estate Investment Trust certainly has some positive factors to consider. In particular, the significant profit growth supported by a decent ROE. Although the company only reinvests a small portion of its profits, it has still managed to grow its profits in a way that is noticeable. With that in mind, a study of the latest analyst forecast shows that the company’s future earnings growth is likely to slow. To learn more about the company’s future earnings growth forecasts, take a look free Report on analyst forecast for the company to learn more.
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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. We want to provide you with a long-term, focused analysis based on fundamental data. Note that our analysis may not take into account the latest price sensitive company announcements or quality materials. Simply Wall St has no position in the stocks mentioned.
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