Charter Hall Retail Real Estate Investment Trust's (ASX:CQR) Has Had A Decent Run On The Stock market: Are Fundamentals In The Driver's Seat?

Charter Hall Retail Real Estate Investment Trust's (ASX:CQR) stock is up by 9.4% over the past three months. As most would know, long-term fundamentals have a strong correlation with market price movements, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. Particularly, we will be paying attention to Charter Hall Retail Real Estate Investment Trust's ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

Check out our latest analysis for Charter Hall Retail Real Estate Investment Trust

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 Retail Real Estate Investment Trust is:

13% = AU$291m ÷ AU$2.3b (Based on the trailing twelve months to June 2021).

The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every A$1 worth of equity, the company was able to earn A$0.13 in profit.

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 everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

Charter Hall Retail Real Estate Investment Trust's Earnings Growth And 13% ROE

To begin with, Charter Hall Retail Real Estate Investment Trust seems to have a respectable ROE. And on comparing with the industry, we found that the the average industry ROE is similar at 13%. However, while Charter Hall Retail Real Estate Investment Trust has a pretty respectable ROE, its five year net income decline rate was 18% . So, there might be some other aspects that could explain this. Such as, the company pays out a huge portion of its earnings as dividends, or is faced with competitive pressures.

Furthermore, even when compared to the industry, which has been shrinking its earnings at a rate 0.3% in the same period, we found that Charter Hall Retail Real Estate Investment Trust's performance is pretty disappointing, as it suggests that the company has been shrunk its earnings at a rate faster than the industry.

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. Has the market priced in the future outlook for CQR? You can find out in our latest intrinsic value infographic research report.

Is Charter Hall Retail Real Estate Investment Trust Efficiently Re-investing Its Profits?

Charter Hall Retail Real Estate Investment Trust has a very high three-year median payout ratio of 82%, implying that it retains only 18% of its profits. However, it's not unusual to see a REIT with such a high payout ratio mainly due to statutory requirements. So this probably explains the company's shrinking earnings.

Additionally, Charter Hall Retail Real Estate Investment Trust 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. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 89%. Regardless, Charter Hall Retail Real Estate Investment Trust's ROE is speculated to decline to 6.8% despite there being no anticipated change in its payout ratio.

Summary

Overall, we feel that Charter Hall Retail Real Estate Investment Trust certainly does have some positive factors to consider. Although, we are disappointed to see a lack of growth in earnings even in spite of a high ROE. Bear in mind, the company reinvests a small portion of its profits, which means that investors aren't reaping the benefits of the high rate of return. With that said, we studied current analyst estimates and discovered that analysts expect the company's earnings growth to improve slightly. This could offer some relief to the company's existing shareholders. 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.