Charter Hall Long WALE REIT (ASX:CLW) Stock's On A Decline: Are Poor Fundamentals The Cause?

Charter Hall Long WALE REIT (ASX:CLW) has had a rough three months with its share price down 3.4%. Given that stock prices are usually driven by a company’s fundamentals over the long term, which in this case look pretty weak, we decided to study the company's key financial indicators. In this article, we decided to focus on Charter Hall Long WALE REIT's ROE.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

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How Do You Calculate Return On Equity?

Return on equity can be calculated by using the formula:

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

So, based on the above formula, the ROE for Charter Hall Long WALE REIT is:

3.6% = AU$118m ÷ AU$3.3b (Based on the trailing twelve months to June 2025).

The 'return' refers to a company's earnings over the last year. So, this means that for every A$1 of its shareholder's investments, the company generates a profit of A$0.04.

View our latest analysis for Charter Hall Long WALE REIT

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.

Charter Hall Long WALE REIT's Earnings Growth And 3.6% ROE

It is hard to argue that Charter Hall Long WALE REIT's ROE is much good in and of itself. Even when compared to the industry average of 5.9%, the ROE figure is pretty disappointing. Therefore, it might not be wrong to say that the five year net income decline of 43% seen by Charter Hall Long WALE REIT was possibly a result of it having a lower ROE. We believe that there also might be other aspects that are negatively influencing the company's earnings prospects. For instance, the company has a very high payout ratio, or is faced with competitive pressures.

Furthermore, even when compared to the industry, which has been shrinking its earnings at a rate of 29% over the last few years, we found that Charter Hall Long WALE REIT's performance is pretty disappointing, as it suggests that the company has been shrunk its earnings at a rate faster than the industry.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. What is CLW worth today? The intrinsic value infographic in our free research report helps visualize whether CLW is currently mispriced by the market.

Is Charter Hall Long WALE REIT Using Its Retained Earnings Effectively?

Charter Hall Long WALE REIT's high three-year median payout ratio of 105% suggests that the company is depleting its resources to keep up its dividend payments, and this shows in its shrinking earnings. Its usually very hard to sustain dividend payments that are higher than reported profits. To know the 3 risks we have identified for Charter Hall Long WALE REIT visit our risks dashboard for free.

In addition, Charter Hall Long WALE REIT has been paying dividends over a period of nine years suggesting that keeping up dividend payments is preferred by the management even though earnings have been in decline. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 100% of its profits over the next three years. However, Charter Hall Long WALE REIT's ROE is predicted to rise to 5.4% despite there being no anticipated change in its payout ratio.

Summary

In total, we would have a hard think before deciding on any investment action concerning Charter Hall Long WALE REIT. Specifically, it has shown quite an unsatisfactory performance as far as earnings growth is concerned, and a poor ROE and an equally poor rate of reinvestment seem to be the reason behind this inadequate performance. With that said, we studied the latest analyst forecasts and found that while the company has shrunk its earnings in the past, analysts expect its earnings to grow in the future. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.