Axis Real Estate Investment Trust's (KLSE:AXREIT) Has Had A Decent Run On The Stock market: Are Fundamentals In The Driver's Seat?

By
Simply Wall St
Published
April 28, 2021
KLSE:AXREIT

Axis Real Estate Investment Trust's (KLSE:AXREIT) stock up by 2.6% 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 Axis Real Estate Investment Trust'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. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View our latest analysis for Axis Real Estate Investment Trust

How Do You 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 Axis Real Estate Investment Trust is:

6.8% = RM145m ÷ RM2.1b (Based on the trailing twelve months to March 2021).

The 'return' is the profit over the last twelve months. Another way to think of that is that for every MYR1 worth of equity, the company was able to earn MYR0.07 in profit.

What Is The Relationship Between ROE And 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. 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 Axis Real Estate Investment Trust's Earnings Growth And 6.8% ROE

At first glance, Axis Real Estate Investment Trust's ROE doesn't look very promising. Although a closer study shows that the company's ROE is higher than the industry average of 3.1% which we definitely can't overlook. This probably goes some way in explaining Axis Real Estate Investment Trust's moderate 13% growth over the past five years amongst other factors. Bear in mind, the company does have a moderately low ROE. It is just that the industry ROE is lower. So there might well be other reasons for the earnings to grow. Such as- high earnings retention or the company belonging to a high growth industry.

When you consider the fact that the industry earnings have shrunk at a rate of 8.9% in the same period, the company's net income growth is pretty remarkable.

past-earnings-growth
KLSE:AXREIT Past Earnings Growth April 29th 2021

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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. What is AXREIT worth today? The intrinsic value infographic in our free research report helps visualize whether AXREIT is currently mispriced by the market.

Is Axis Real Estate Investment Trust Making Efficient Use Of Its Profits?

Axis Real Estate Investment Trust has a high three-year median payout ratio of 65%. This means that it has only 35% of its income left to reinvest into its business. However, it's not unusual to see a REIT with such a high payout ratio mainly due to statutory requirements. Despite this, the company's earnings grew moderately as we saw above.

Additionally, Axis Real Estate Investment Trust has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Our latest analyst data shows that the future payout ratio of the company is expected to rise to 99% over the next three years. Regardless, the ROE is not expected to change much for the company despite the higher expected payout ratio.

Summary

On the whole, we do feel that Axis Real Estate Investment Trust has some positive attributes. Especially the substantial growth in earnings backed by a decent ROE. Despite the company reinvesting only a small portion of its profits, it still has managed to grow its earnings so that is appreciable. 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 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. 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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