Is Alternative Income REIT Plc's (LON:AIRE) Recent Stock Performance Influenced By Its Fundamentals In Any Way?

Alternative Income REIT (LON:AIRE) has had a great run on the share market with its stock up by a significant 11% over the last week. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. In this article, we decided to focus on Alternative Income REIT'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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

Check out our latest analysis for Alternative Income REIT

How To 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 Alternative Income REIT is:

3.6% = UK£2.4m ÷ UK£65m (Based on the trailing twelve months to June 2024).

The 'return' is the yearly profit. That means that for every £1 worth of shareholders' equity, the company generated £0.04 in profit.

What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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 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 Alternative Income REIT's Earnings Growth And 3.6% ROE

It is quite clear that Alternative Income REIT's ROE is rather low. Further, we noted that the company's ROE is similar to the industry average of 3.6%. Accordingly, Alternative Income REIT's low net income growth of 4.5% over the past five years can possibly be explained by the low ROE amongst other factors.

Given that the industry shrunk its earnings at a rate of 8.0% over the last few years, the net income growth of the company is quite impressive.

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. 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 Alternative Income REIT is trading on a high P/E or a low P/E, relative to its industry.

Is Alternative Income REIT Making Efficient Use Of Its Profits?

Alternative Income REIT seems to be paying out most of its income as dividends judging by its three-year median payout ratio of 91% (or a retention ratio of 9.1%). However, this is typical for REITs as they are often required by law to distribute most of their earnings. So this probably explains the low earnings growth seen by the company.

Additionally, Alternative Income REIT has paid dividends over a period of seven years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth.

Conclusion

Overall, we feel that Alternative Income REIT certainly does have some positive factors to consider. 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. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. Our risks dashboard would have the 4 risks we have identified for Alternative Income REIT.

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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.