Olimpo Real Estate SOCIMI, S.A.'s (BME:YORE) Stock Has Seen Strong Momentum: Does That Call For Deeper Study Of Its Financial Prospects?

Olimpo Real Estate SOCIMI's (BME:YORE) stock is up by a considerable 18% over the past three months. 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 Olimpo Real Estate SOCIMI's ROE in this article.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. 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 Olimpo Real Estate SOCIMI

How Is ROE Calculated?

The formula for return on equity is:

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

So, based on the above formula, the ROE for Olimpo Real Estate SOCIMI is:

3.5% = €6.5m ÷ €184m (Based on the trailing twelve months to June 2020).

The 'return' is the amount earned after tax over the last twelve months. Another way to think of that is that for every €1 worth of equity, the company was able to earn €0.04 in profit.

Why Is ROE Important For 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.

Olimpo Real Estate SOCIMI's Earnings Growth And 3.5% ROE

At first glance, Olimpo Real Estate SOCIMI's ROE doesn't look very promising. Next, when compared to the average industry ROE of 6.8%, the company's ROE leaves us feeling even less enthusiastic. In spite of this, Olimpo Real Estate SOCIMI was able to grow its net income considerably, at a rate of 76% in the last five years. So, there might be other aspects that are positively influencing the company's earnings growth. Such as - high earnings retention or an efficient management in place.

Next, on comparing with the industry net income growth, we found that Olimpo Real Estate SOCIMI's growth is quite high when compared to the industry average growth of 31% in the same period, which is great to see.

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. Is Olimpo Real Estate SOCIMI fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Olimpo Real Estate SOCIMI Using Its Retained Earnings Effectively?

Olimpo Real Estate SOCIMI seems to be paying out most of its income as dividends judging by its three-year median payout ratio of 63%, meaning the company retains only 37% of its income. However, this is typical for REITs as they are often required by law to distribute most of their earnings. In spite of this, the company was able to grow its earnings significantly, as we saw above.

Moreover, Olimpo Real Estate SOCIMI is determined to keep sharing its profits with shareholders which we infer from its long history of three years of paying a dividend.

Summary

On the whole, we do feel that Olimpo Real Estate SOCIMI has some positive attributes. Namely, its high earnings growth. We do however feel that the earnings growth number could have been even higher, had the company been reinvesting more of its earnings and paid out less dividends. Up till now, we've only made a short study of the company's growth data. To gain further insights into Olimpo Real Estate SOCIMI's past profit growth, check out this visualization 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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