Is Shurgard Self Storage S.A.'s (EBR:SHUR) Recent Stock Performance Influenced By Its Fundamentals In Any Way?

Shurgard Self Storage (EBR:SHUR) has had a great run on the share market with its stock up by a significant 7.3% over the last month. As most would know, fundamentals are what usually guide market price movements over the long-term, 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. Specifically, we decided to study Shurgard Self Storage's ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

View our latest analysis for Shurgard Self Storage

How Is ROE Calculated?

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 Shurgard Self Storage is:

13% = €247m ÷ €2.0b (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 €1 of its shareholder's investments, the company generates a profit of €0.13.

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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. 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.

Shurgard Self Storage's Earnings Growth And 13% ROE

To start with, Shurgard Self Storage's ROE looks acceptable. And on comparing with the industry, we found that the the average industry ROE is similar at 12%. Despite the modest returns, Shurgard Self Storage's five year net income growth was quite low, averaging at only 2.7%. So, there could be some other factors at play that could be impacting the company's growth. For instance, the company pays out a huge portion of its earnings as dividends, or is faced with competitive pressures.

Next, on comparing with the industry net income growth, we found that Shurgard Self Storage's reported growth was lower than the industry growth of 20% in the same period, which is not something we like to see.

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. This then helps them determine if the stock is placed for a bright or bleak future. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Shurgard Self Storage is trading on a high P/E or a low P/E, relative to its industry.

Is Shurgard Self Storage Using Its Retained Earnings Effectively?

Despite having a moderate three-year median payout ratio of 36% (implying that the company retains the remaining 64% of its income), Shurgard Self Storage's earnings growth was quite low. So there could be some other explanation in that regard. For instance, the company's business may be deteriorating.

Additionally, Shurgard Self Storage started paying a dividend only recently. So it looks like the management must have perceived that shareholders favor dividends over earnings growth. Our latest analyst data shows that the future payout ratio of the company is expected to rise to 83% over the next three years. Consequently, the higher expected payout ratio explains the decline in the company's expected ROE (to 5.5%) over the same period.

Summary

On the whole, we do feel that Shurgard Self Storage has some positive attributes. Although, we are disappointed to see a lack of growth in earnings even in spite of a high ROE and and a high reinvestment rate. We believe that there might be some outside factors that could be having a negative impact on the business. 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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