RioCan Real Estate Investment Trust's (TSE:REI.UN) Financial Prospects Don't Look Very Positive: Could It Mean A Stock Price Drop In The Future?

Most readers would already know that RioCan Real Estate Investment Trust's (TSE:REI.UN) stock increased by 3.1% over the past month. However, its weak financial performance indicators makes us a bit doubtful if that trend could continue. Particularly, we will be paying attention to RioCan Real Estate Investment Trust's ROE today.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out our latest analysis for RioCan 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 RioCan Real Estate Investment Trust is:

5.7% = CA$455m ÷ CA$7.9b (Based on the trailing twelve months to September 2021).

The 'return' is the yearly profit. One way to conceptualize this is that for each CA$1 of shareholders' capital it has, the company made CA$0.06 in profit.

Why Is ROE Important For Earnings Growth?

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

A Side By Side comparison of RioCan Real Estate Investment Trust's Earnings Growth And 5.7% ROE

When you first look at it, RioCan Real Estate Investment Trust's ROE doesn't look that attractive. A quick further study shows that the company's ROE doesn't compare favorably to the industry average of 10% either. For this reason, RioCan Real Estate Investment Trust's five year net income decline of 22% is not surprising given its lower ROE. We reckon that there could also be other factors at play here. Such as - low earnings retention or poor allocation of capital.

However, when we compared RioCan Real Estate Investment Trust's growth with the industry we found that while the company's earnings have been shrinking, the industry has seen an earnings growth of 13% in the same period. This is quite worrisome.

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

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

RioCan Real Estate Investment Trust has a very high three-year median payout ratio of 78%, implying that it retains only 22% of its profits. However, it's not unusual to see a REIT with such a high payout ratio mainly due to statutory requirements. Accordingly, this likely explains why its earnings have been shrinking.

Moreover, RioCan Real Estate Investment Trust has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth. Our latest analyst data shows that the future payout ratio of the company is expected to drop to 62% over the next three years.

Conclusion

On the whole, RioCan Real Estate Investment Trust's performance is quite a big let-down. As a result of its low ROE and lack of much reinvestment into the business, the company has seen a disappointing earnings growth rate. So far, we've only made a quick discussion around the company's earnings growth. So it may be worth checking this free detailed graph of RioCan Real Estate Investment Trust's past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.

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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.