Can Agro Finance REIT (BUL:AGF) Rely On Its Fundamentals For Future Uptrend In Price?

By
Simply Wall St
Published
July 05, 2021
BUL:AGF
Source: Shutterstock

Agro Finance REIT's (BUL:AGF) stock was mostly flat over the past three months. However, the company's key financials probably have more to say so you may want to give the company a closer look given that stock prices usually follow the long-term financial performance of a business. Particularly, we will be paying attention to Agro Finance REIT's ROE today.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

Check out our latest analysis for Agro Finance REIT

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 Agro Finance REIT is:

11% = лв6.7m ÷ лв62m (Based on the trailing twelve months to March 2021).

The 'return' is the amount earned after tax over the last twelve months. So, this means that for every BGN1 of its shareholder's investments, the company generates a profit of BGN0.11.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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.

Agro Finance REIT's Earnings Growth And 11% ROE

To start with, Agro Finance REIT's ROE looks acceptable. Especially when compared to the industry average of 2.5% the company's ROE looks pretty impressive. Despite this, Agro Finance REIT's five year net income growth was quite flat over the past five years. Therefore, there could be some other aspects that could potentially be preventing the company from growing. Such as, the company pays out a huge portion of its earnings as dividends, or is faced with competitive pressures.

As a next step, we compared Agro Finance REIT's net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 2.1% in the same period.

past-earnings-growth
BUL:AGF Past Earnings Growth July 5th 2021

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. Is Agro Finance REIT fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Agro Finance REIT Making Efficient Use Of Its Profits?

Agro Finance REIT seems to be paying out most of its income as dividends judging by its three-year median payout ratio of 101%, meaning that the company retains only -0.9% of its profits. However, this is typical for REITs as they are often required by law to distribute most of their earnings. Accordingly, this suggests that the company's earnings growth was miniscule as a result of the high payout.

In addition, Agro Finance REIT has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth.

Summary

In total, it does look like Agro Finance REIT has some positive aspects to its business. The company has grown its earnings moderately as a result of its impressive ROE. Yet, the business is retaining hardly any of its profits. This might have negative implications on the company's future growth. So far, we've only made a quick discussion around the company's earnings growth. You can do your own research on Agro Finance REIT and see how it has performed in the past by looking at this FREE detailed graph of past earnings, revenue and cash flows.

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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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