Is The Market Rewarding Brookfield India Real Estate Trust (NSE:BIRET) With A Negative Sentiment As A Result Of Its Mixed Fundamentals?

By
Simply Wall St
Published
May 13, 2022
NSEI:BIRET
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Brookfield India Real Estate Trust (NSE:BIRET) has had a rough week with its share price down 4.9%. It seems that the market might have completely ignored the positive aspects of the company's fundamentals and decided to weigh-in more on the negative aspects. Stock prices are usually driven by a company’s financial performance over the long term, and therefore we decided to pay more attention to the company's financial performance. Particularly, we will be paying attention to Brookfield India Real Estate Trust's ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

See our latest analysis for Brookfield India Real Estate Trust

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 Brookfield India Real Estate Trust is:

3.0% = ₹2.4b ÷ ₹80b (Based on the trailing twelve months to December 2021).

The 'return' refers to a company's earnings over the last year. That means that for every ₹1 worth of shareholders' equity, the company generated ₹0.03 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. 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 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.

Brookfield India Real Estate Trust's Earnings Growth And 3.0% ROE

It is quite clear that Brookfield India Real Estate Trust's ROE is rather low. Even compared to the average industry ROE of 6.0%, the company's ROE is quite dismal. In spite of this, Brookfield India Real Estate Trust was able to grow its net income considerably, at a rate of 21% in the last five years. We believe that 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.

We then compared Brookfield India Real Estate Trust's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 7.0% in the same period.

past-earnings-growth
NSEI:BIRET Past Earnings Growth May 13th 2022

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Has the market priced in the future outlook for BIRET? You can find out in our latest intrinsic value infographic research report.

Is Brookfield India Real Estate Trust Making Efficient Use Of Its Profits?

Brookfield India Real Estate Trust's very high three-year median payout ratio of 145% suggests that the company is paying more to its shareholders than what it is earning. In spite of this, the company was able to grow its earnings significantly, as we saw above. Although, it could be worth keeping an eye on the high payout ratio as that's a huge risk.

While Brookfield India Real Estate Trust has seen growth in its earnings, it only recently started to pay a dividend. It is most likely that the company decided to impress new and existing shareholders with a dividend. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 163%. Still, forecasts suggest that Brookfield India Real Estate Trust's future ROE will rise to 5.9% even though the the company's payout ratio is not expected to change by much.

Summary

On the whole, we feel that the performance shown by Brookfield India Real Estate Trust can be open to many interpretations. Although the company has shown a pretty impressive growth in earnings, yet the low ROE and the low rate of reinvestment makes us skeptical about the continuity of that growth, especially when or if the business comes to face any threats. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. 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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