Dream Industrial Real Estate Investment Trust's (TSE:DIR.UN) Recent Stock Performance Looks Decent- Can Strong Fundamentals Be the Reason?

By
Simply Wall St
Published
January 12, 2021
TSX:DIR.UN

Dream Industrial Real Estate Investment Trust's (TSE:DIR.UN) stock is up by 10.0% over the past three months. Given its impressive performance, we decided to study the company's key financial indicators as a company's long-term fundamentals usually dictate market outcomes. Particularly, we will be paying attention to Dream Industrial 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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Check out our latest analysis for Dream Industrial Real Estate Investment Trust

How Do You Calculate Return On Equity?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Dream Industrial Real Estate Investment Trust is:

12% = CA$225m ÷ CA$1.9b (Based on the trailing twelve months to September 2020).

The 'return' is the income the business earned over the last year. Another way to think of that is that for every CA$1 worth of equity, the company was able to earn CA$0.12 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. 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.

A Side By Side comparison of Dream Industrial Real Estate Investment Trust's Earnings Growth And 12% ROE

At first glance, Dream Industrial Real Estate Investment Trust seems to have a decent ROE. Even when compared to the industry average of 10% the company's ROE looks quite decent. This certainly adds some context to Dream Industrial Real Estate Investment Trust's exceptional 50% net income growth seen over the past five years. However, there could also be other drivers behind this growth. Such as - high earnings retention or an efficient management in place.

Next, on comparing with the industry net income growth, we found that Dream Industrial Real Estate Investment Trust's growth is quite high when compared to the industry average growth of 23% in the same period, which is great to see.

past-earnings-growth
TSX:DIR.UN Past Earnings Growth January 12th 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). 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 Dream Industrial Real Estate Investment Trust is trading on a high P/E or a low P/E, relative to its industry.

Is Dream Industrial Real Estate Investment Trust Efficiently Re-investing Its Profits?

Dream Industrial Real Estate Investment Trust has a very high three-year median payout ratio of 50%. This means that it has only 50% of its income left to reinvest into its business. However, it's not unusual to see a REIT with such a high payout ratio mainly due to statutory requirements. In spite of this, the company was able to grow its earnings significantly, as we saw above.

Additionally, Dream Industrial Real Estate Investment Trust has paid dividends over a period of eight years which means that the company is pretty serious about sharing its profits with shareholders. Our latest analyst data shows that the future payout ratio of the company is expected to rise to 83% over the next three years.

Conclusion

In total, we are pretty happy with Dream Industrial Real Estate Investment Trust's performance. Especially the high ROE, Which has contributed to the impressive growth seen in earnings. Despite the company reinvesting only a small portion of its profits, it still has managed to grow its earnings so that is appreciable. Having said that, on studying current analyst estimates, we were concerned to see that while the company has grown its earnings in the past, analysts expect its earnings to shrink 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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