With An ROE Of 6.01%, Has Schroder European Real Estate Investment Trust Plc's (LON:SERE) Management Done A Good Job?

With an ROE of 6.01%, Schroder European Real Estate Investment Trust Plc (LSE:SERE) returned in-line to its own industry which delivered 8.38% over the past year. But what is more interesting is whether SERE can sustain or improve on this level of return. I will take you through how metrics such as financial leverage impact ROE which may affect the overall sustainability of SERE's returns. Check out our latest analysis for Schroder European Real Estate Investment Trust

What you must know about ROE

Return on Equity (ROE) weighs Schroder European Real Estate Investment Trust’s profit against the level of its shareholders’ equity. It essentially shows how much the company can generate in earnings given the amount of equity it has raised. Investors seeking to maximise their return in the Diversified REITs industry may want to choose the highest returning stock. However, this can be misleading as each firm has different costs of equity and debt levels i.e. the more debt Schroder European Real Estate Investment Trust has, the higher ROE is pumped up in the short term, at the expense of long term interest payment burden.

Returns are usually compared to costs to measure the efficiency of capital. Schroder European Real Estate Investment Trust’s cost of equity is 8.30%. Given a discrepancy of -2.29% between return and cost, this indicated that Schroder European Real Estate Investment Trust may be paying more for its capital than what it’s generating in return. ROE can be split up into three useful ratios: net profit margin, asset turnover, and financial leverage. This is called the Dupont Formula:

Basically, profit margin measures how much of revenue trickles down into earnings which illustrates how efficient the business is with its cost management. Asset turnover reveals how much revenue can be generated from Schroder European Real Estate Investment Trust’s asset base. Finally, financial leverage will be our main focus today. It shows how much of assets are funded by equity and can show how sustainable the company’s capital structure is. We can determine if Schroder European Real Estate Investment Trust’s ROE is inflated by borrowing high levels of debt. Generally, a balanced capital structure means its returns will be sustainable over the long run. We can examine this by looking at Schroder European Real Estate Investment Trust’s debt-to-equity ratio. The most recent ratio is 31.60%, which is sensible and indicates Schroder European Real Estate Investment Trust has not taken on too much leverage. Thus, we can conclude its below-average ROE may be a result of low debt, and Schroder European Real Estate Investment Trust still has room to increase leverage and grow future returns.

Next Steps:

ROE is one of many ratios which meaningfully dissects financial statements, which illustrates the quality of a company. Schroder European Real Estate Investment Trust’s ROE is underwhelming relative to the industry average, and its returns were also not strong enough to cover its own cost of equity. However, ROE is not likely to be inflated by excessive debt funding, giving shareholders more conviction in the sustainability of returns, which has headroom to increase further. ROE is a helpful signal, but it is definitely not sufficient on its own to make an investment decision.

For Schroder European Real Estate Investment Trust, there are three key factors you should further research:

• 1. Financial Health: Does it have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
• 2. Valuation: What is Schroder European Real Estate Investment Trust worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether Schroder European Real Estate Investment Trust is currently mispriced by the market.
• 3. Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of Schroder European Real Estate Investment Trust? Explore our interactive list of stocks with large growth potential to get an idea of what else is out there you may be missing!

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Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article 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.