Growthpoint Properties Australia's (ASX:GOZ) Has Had A Decent Run On The Stock market: Are Fundamentals In The Driver's Seat?

Growthpoint Properties Australia's (ASX:GOZ) stock up by 6.9% 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. In this article, we decided to focus on Growthpoint Properties Australia'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. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for Growthpoint Properties Australia

How To 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 Growthpoint Properties Australia is:

9.6% = AU$272m ÷ AU$2.8b (Based on the trailing twelve months to June 2020).

The 'return' is the amount earned after tax over the last twelve months. So, this means that for every A$1 of its shareholder's investments, the company generates a profit of A$0.10.

What Has ROE Got To Do With Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.

Growthpoint Properties Australia's Earnings Growth And 9.6% ROE

At first glance, Growthpoint Properties Australia's ROE doesn't look very promising. However, the fact that the its ROE is quite higher to the industry average of 6.6% doesn't go unnoticed by us. Consequently, this likely laid the ground for the decent growth of 8.5% seen over the past five years by Growthpoint Properties Australia. That being said, the company does have a slightly low ROE to begin with, just that it is higher than the industry average. Hence there might be some other aspects that are causing earnings to grow. E.g the company has a low payout ratio or could belong to a high growth industry.

We then performed a comparison between Growthpoint Properties Australia's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 8.5% in the same period.

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. What is GOZ worth today? The intrinsic value infographic in our free research report helps visualize whether GOZ is currently mispriced by the market.

Is Growthpoint Properties Australia Efficiently Re-investing Its Profits?

Growthpoint Properties Australia 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. In spite of this, the company was able to grow its earnings by a fair bit, as we saw above.

Besides, Growthpoint Properties Australia has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 86%. Still, forecasts suggest that Growthpoint Properties Australia's future ROE will drop to 6.2% even though the the company's payout ratio is not expected to change by much.

Summary

On the whole, we do feel that Growthpoint Properties Australia has some positive attributes. Especially the substantial growth in earnings backed by a decent ROE. Despite the company reinvesting only a small portion of its profits, it still has managed to grow its earnings so that is appreciable. 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 company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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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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