Does The Market Have A Low Tolerance For Embassy Office Parks REIT's (NSE:EMBASSY) Mixed Fundamentals?

With its stock down 5.0% over the past month, it is easy to disregard Embassy Office Parks REIT (NSE:EMBASSY). We, however decided to study the company's financials to determine if they have got anything to do with the price decline. Long-term fundamentals are usually what drive market outcomes, so it's worth paying close attention. In this article, we decided to focus on Embassy Office Parks REIT's ROE.

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. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out our latest analysis for Embassy Office Parks REIT

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 Embassy Office Parks REIT is:

3.4% = ₹7.5b ÷ ₹218b (Based on the trailing twelve months to September 2020).

The 'return' is the amount earned after tax over the last twelve months. So, this means that for every ₹1 of its shareholder's investments, the company generates a profit of ₹0.03.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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.

A Side By Side comparison of Embassy Office Parks REIT's Earnings Growth And 3.4% ROE

It is quite clear that Embassy Office Parks REIT's ROE is rather low. Not just that, even compared to the industry average of 5.5%, the company's ROE is entirely unremarkable. Despite this, surprisingly, Embassy Office Parks REIT saw an exceptional 38% net income growth over the past five years. Therefore, there could be other reasons behind this growth. Such as - high earnings retention or an efficient management in place.

We then compared Embassy Office Parks REIT'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 10% in the same period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. Is Embassy Office Parks REIT fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Embassy Office Parks REIT Efficiently Re-investing Its Profits?

Embassy Office Parks REIT has very a high three-year median payout ratio of 107% suggesting that the company's shareholders are getting paid from more than just the company's earnings. In spite of this, the company was able to grow its earnings significantly, as we saw above. Having said that, the high payout ratio is definitely risky and something to keep an eye on. Our risks dashboard should have the 2 risks we have identified for Embassy Office Parks REIT.

While Embassy Office Parks REIT 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 92%. Regardless, the future ROE for Embassy Office Parks REIT is predicted to rise to 6.0% despite there being not much change expected in its payout ratio.

Conclusion

In total, we're a bit ambivalent about Embassy Office Parks REIT's performance. While no doubt its earnings growth is pretty substantial, its ROE and earnings retention is quite poor. So while the company has managed to grow its earnings in spite of this, we are unconvinced if this growth could extend, especially during troubled times. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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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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