Do Fundamentals Have Any Role To Play In Driving IGB Real Estate Investment Trust's (KLSE:IGBREIT) Stock Up Recently?

Most readers would already know that IGB Real Estate Investment Trust's (KLSE:IGBREIT) stock increased by 4.2% over the past month. As most would know, long-term fundamentals have a strong correlation with market price movements, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. Particularly, we will be paying attention to IGB Real Estate Investment Trust's ROE today.

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 IGB Real Estate Investment Trust

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 IGB Real Estate Investment Trust is:

6.3% = RM240m ÷ RM3.8b (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 MYR1 of its shareholder's investments, the company generates a profit of MYR0.06.

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. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.

IGB Real Estate Investment Trust's Earnings Growth And 6.3% ROE

At first glance, IGB Real Estate Investment Trust's ROE doesn't look very promising. However, the fact that the its ROE is quite higher to the industry average of 3.9% doesn't go unnoticed by us. However, IGB Real Estate Investment Trust's five year net income growth was quite low averaging at only 3.1%. Bear in mind, the company does have a low ROE. It is just that the industry ROE is lower. So that could be one of the factors that are causing earnings growth to stay low.

When you consider the fact that the industry earnings have shrunk at a rate of 9.1% in the same period, the company's net income growth is pretty remarkable.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. What is IGBREIT worth today? The intrinsic value infographic in our free research report helps visualize whether IGBREIT is currently mispriced by the market.

Is IGB Real Estate Investment Trust Efficiently Re-investing Its Profits?

IGB Real Estate Investment Trust has a very high three-year median payout ratio of84%, implying that it retains only 16% of its profits. However, it's not unusual to see a REIT with such a high payout ratio mainly due to statutory requirements. Accordingly, this suggests that the company's earnings growth was lower as a result of the high payout.

Additionally, IGB Real Estate Investment Trust has paid dividends over a period of eight years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to rise to 104% over the next three years. Still, forecasts suggest that IGB Real Estate Investment Trust's future ROE will rise to 7.7% even though the the company's payout ratio is expected to rise. We presume that there could some other characteristics of the business that could be driving the anticipated growth in the company's ROE.

Conclusion

Overall, we feel that IGB Real Estate Investment Trust certainly does have some positive factors to consider. 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. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page 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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