Is Embassy Office Parks REIT's (NSE:EMBASSY) Recent Stock Performance Influenced By Its Financials In Any Way?

Embassy Office Parks REIT's (NSE:EMBASSY) stock is up by 1.5% over the past week. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. In this article, we decided to focus on Embassy Office Parks REIT's ROE.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Check out our latest analysis for Embassy Office Parks REIT

How Do You Calculate Return On Equity?

ROE 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% = ₹8.6b ÷ ₹256b (Based on the trailing twelve months to June 2022).

The 'return' is the yearly profit. One way to conceptualize this is that for each ₹1 of shareholders' capital it has, the company made ₹0.03 in profit.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

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

As you can see, Embassy Office Parks REIT's ROE looks pretty weak. Even when compared to the industry average of 6.1%, the ROE figure is pretty disappointing. However, we we're pleasantly surprised to see that Embassy Office Parks REIT grew its net income at a significant rate of 27% in the last five years. We believe that there might be other aspects that are positively influencing the company's earnings growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

Next, on comparing with the industry net income growth, we found that Embassy Office Parks REIT's growth is quite high when compared to the industry average growth of 7.8% in the same period, which is great to see.

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. Has the market priced in the future outlook for EMBASSY? You can find out in our latest intrinsic value infographic research report.

Is Embassy Office Parks REIT Making Efficient Use Of Its Profits?

Embassy Office Parks REIT seems to be paying out most of its income as dividends judging by its three-year median payout ratio of 93%, meaning the company retains only 7.2% 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.

Besides, Embassy Office Parks REIT has been paying dividends over a period of three years. This shows that the company is committed to sharing profits with its shareholders. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 96%. Regardless, the future ROE for Embassy Office Parks REIT is predicted to rise to 6.1% despite there being not much change expected in its payout ratio.

Conclusion

In total, it does look like Embassy Office Parks REIT has some positive aspects to its business. 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. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. 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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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.