Has APN Industria REIT's (ASX:ADI) Impressive Stock Performance Got Anything to Do With Its Fundamentals?

Most readers would already be aware that APN Industria REIT's (ASX:ADI) stock increased significantly by 10% over the past three months. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. Particularly, we will be paying attention to APN Industria REIT's ROE today.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for APN Industria REIT

How Is ROE Calculated?

The formula for return on equity is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for APN Industria REIT is:

9.8% = AU$55m ÷ AU$558m (Based on the trailing twelve months to June 2020).

The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each A$1 of shareholders' capital it has, the company made A$0.10 in profit.

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

APN Industria REIT's Earnings Growth And 9.8% ROE

When you first look at it, APN Industria REIT's ROE doesn't look that attractive. However, the fact that the its ROE is quite higher to the industry average of 6.6% doesn't go unnoticed by us. This probably goes some way in explaining APN Industria REIT's moderate 12% growth over the past five years amongst other factors. Bear in mind, the company does have a moderately low ROE. It is just that the industry ROE is lower. So there might well be other reasons for the earnings to grow. Such as- high earnings retention or the company belonging to a high growth industry.

Next, on comparing with the industry net income growth, we found that APN Industria REIT's growth is quite high when compared to the industry average growth of 8.5% in the same period, which is great to see.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. What is ADI worth today? The intrinsic value infographic in our free research report helps visualize whether ADI is currently mispriced by the market.

Is APN Industria REIT Making Efficient Use Of Its Profits?

APN Industria REIT seems to be paying out most of its income as dividends judging by its three-year median payout ratio of 89%, meaning the company retains only 11% of its income. However, this is typical for REITs as they are often required by law to distribute most of their earnings. Despite this, the company's earnings grew moderately as we saw above.

Besides, APN Industria REIT has been paying dividends over a period of six years. This shows that the company is committed to sharing profits with its shareholders. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 88% of its profits over the next three years. Regardless, APN Industria REIT's ROE is speculated to decline to 7.3% despite there being no anticipated change in its payout ratio.

Summary

Overall, we feel that APN Industria REIT certainly does have some positive factors to consider. Namely, its significant earnings growth, to which its moderate rate of return likely contributed. While the company is paying out most of its earnings as dividends, it has been able to grow its earnings in spite of it, so that's probably a good sign. That being so, according to the latest industry analyst forecasts, the company's earnings are expected to shrink in the future. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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