Stock Analysis

Has Instone Real Estate Group AG's (ETR:INS) Impressive Stock Performance Got Anything to Do With Its Fundamentals?

XTRA:INS
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Most readers would already be aware that Instone Real Estate Group's (ETR:INS) stock increased significantly by 15% 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 Instone Real Estate Group's ROE.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. 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 Instone Real Estate Group

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 Instone Real Estate Group is:

6.5% = €34m ÷ €521m (Based on the trailing twelve months to December 2020).

The 'return' is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each €1 of shareholders' capital it has, the company made €0.06 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. 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.

Instone Real Estate Group's Earnings Growth And 6.5% ROE

On the face of it, Instone Real Estate Group's ROE is not much to talk about. A quick further study shows that the company's ROE doesn't compare favorably to the industry average of 8.1% either. Despite this, surprisingly, Instone Real Estate Group saw an exceptional 64% net income growth over the past five years. We reckon that there could be other factors at play here. For instance, the company has a low payout ratio or is being managed efficiently.

Next, on comparing with the industry net income growth, we found that Instone Real Estate Group's growth is quite high when compared to the industry average growth of 11% in the same period, which is great to see.

past-earnings-growth
XTRA:INS Past Earnings Growth April 6th 2021

Earnings growth is a huge factor in stock valuation. 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 Instone Real Estate Group is trading on a high P/E or a low P/E, relative to its industry.

Is Instone Real Estate Group Using Its Retained Earnings Effectively?

Instone Real Estate Group's three-year median payout ratio is a pretty moderate 32%, meaning the company retains 68% of its income. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like Instone Real Estate Group is reinvesting its earnings efficiently.

Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 35%. Regardless, the future ROE for Instone Real Estate Group is predicted to rise to 21% despite there being not much change expected in its payout ratio.

Summary

Overall, we feel that Instone Real Estate Group certainly does have some positive factors to consider. Despite its low rate of return, the fact that the company reinvests a very high portion of its profits into its business, no doubt contributed to its high earnings growth. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. 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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