Can Mixed Fundamentals Have A Negative Impact on Charter Hall Social Infrastructure REIT (ASX:CQE) Current Share Price Momentum?

Charter Hall Social Infrastructure REIT (ASX:CQE) has had a great run on the share market with its stock up by a significant 16% over the last three months. However, we decided to pay attention to the company's fundamentals which don't appear to give a clear sign about the company's financial health. Particularly, we will be paying attention to Charter Hall Social Infrastructure REIT's ROE today.

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. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for Charter Hall Social Infrastructure REIT

How Is ROE Calculated?

ROE 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 Social Infrastructure REIT is:

8.2% = AU$86m ÷ AU$1.1b (Based on the trailing twelve months to June 2020).

The 'return' is the yearly profit. One way to conceptualize this is that for each A$1 of shareholders' capital it has, the company made A$0.08 in profit.

What Is The Relationship Between ROE And Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

A Side By Side comparison of Charter Hall Social Infrastructure REIT's Earnings Growth And 8.2% ROE

On the face of it, Charter Hall Social Infrastructure REIT's ROE is not much to talk about. However, the fact that the company's ROE is higher than the average industry ROE of 6.6%, is definitely interesting. However, Charter Hall Social Infrastructure REIT's five year net income decline rate was 5.9%. Remember, the company's ROE is a bit low to begin with, just that it is higher than the industry average. Hence, this goes some way in explaining the shrinking earnings.

However, when we compared Charter Hall Social Infrastructure REIT's growth with the industry we found that while the company's earnings have been shrinking, the industry has seen an earnings growth of 8.5% in the same period. This is quite worrisome.

Earnings growth is an important metric to consider when valuing a stock. 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 CQE worth today? The intrinsic value infographic in our free research report helps visualize whether CQE is currently mispriced by the market.

Is Charter Hall Social Infrastructure REIT Making Efficient Use Of Its Profits?

Charter Hall Social Infrastructure REIT seems to be paying out most of its income as dividends judging by its three-year median payout ratio of 78% (meaning, the company retains only 22% of profits). However, this is typical for REITs as they are often required by law to distribute most of their earnings. Accordingly, this likely explains why its earnings have been shrinking.

Additionally, Charter Hall Social Infrastructure REIT has paid dividends over a period of at least ten years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth. Looking at the current analyst consensus data, we can see that the company's future payout ratio is expected to rise to 94% over the next three years. Regardless, the ROE is not expected to change much for the company despite the higher expected payout ratio.

Conclusion

Overall, we have mixed feelings about Charter Hall Social Infrastructure REIT. Primarily, we are disappointed to see a lack of growth in earnings even in spite of a moderate ROE. Bear in mind, the company reinvests a small portion of its profits, which explains the lack of growth. 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. 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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