With A Return On Equity Of 8.8%, Has Automotive Properties Real Estate Investment Trust’s (TSE:APR.UN) Management Done Well?
While some investors are already familiar with financial metrics (hat tip), this article is aimed at those who want to learn more about Return On Equity (ROE) and what it means. To learn, we learn the ROE to gain a better understanding of the Automotive Properties Real Estate Investment Trust (TSE: APR.UN).
Return on equity, or ROE, is a key measure used to assess how efficiently a company’s management is using the company’s capital. 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 Automotive Properties Real Estate Investment Trust
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) ÷ Equity
So, based on the formula above, the ROE for Automotive Properties Real Estate Investment Trust is:
8.8% = CA $ 38 million ÷ CA $ 425 million (based on the last twelve months through March 2021).
The “rate of return” is the income that the company has earned over the past year. One way to conceptualize this is for the company to make a profit of CA $ 0.09 for every CA $ 1 of shareholder equity.
Does Automotive Properties Real Estate Investment Trust have a good ROE?
By comparing a company’s ROE to its industry average, we can quickly determine how good it is. It is important that this is far from a perfect measure, as companies differ significantly within the same industry classification. If you look at the image below, you can see that Automotive Properties Real Estate Investment Trust has a ROE similar to the average in the REITs industry ranking (7.7%).
The ROE, while not exceptional, is at least acceptable. While the industry’s ROE is similar, we should still do more checks to see if the company’s high debt is adding to its ROE. If so, it is more indicative of risk than potential. Our risk dashboards should include the 5 risks that we have identified for Automotive Properties Real Estate Investment Trust.
The story goes on
The importance of debt to return on equity
Companies typically need to invest money to grow their profits. This money can come from the issue of stocks, retained earnings, or debt. In the first two cases, the ROE will capture this capital investment for growth. In the latter case, the debt required for growth will increase returns, but not affect equity. This makes the ROE look better than if no debt was used.
Automotive Properties Real Estate Investment Trust debt and its ROE of 8.8%
Automotive Properties Real Estate Investment Trust is clearly using high leverage to increase returns as it has a leverage ratio of 1.21. The combination of a relatively low ROE and a significant use of debt isn’t particularly attractive. Debt increases risk and reduces options for the company in the future. Hence, in general, you want to get good returns from using it.
Return on equity is useful for comparing the quality of different companies. A company that can achieve a high return on equity without debt can be considered a high quality company. In general, if two companies have roughly the same level of debt to equity and one has a higher ROE, I would prefer the company with the higher ROE.
While ROE is a useful indicator of business quality, there are a number of factors you need to consider in order to determine the right price to buy a stock. Earnings growth rates are especially important when compared to the expectations reflected in the stock price. I think this might be worth checking out free Report on analyst forecast for the company.
Naturally, You could find a fantastic investment by looking elsewhere. So take a look at it free List of interesting companies.
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.
Do you have any feedback on this article? Concerned about the content? Get in touch directly with us. Alternatively, you can also send an email to the editorial team (at) simplywallst.com.