Weak Financial Prospects Seem To Be Dragging Down Sunway Real Estate Investment Trust (KLSE:SUNREIT) Stock

Sunway Real Estate Investment Trust (KLSE:SUNREIT) has had a rough three months with its share price down 6.8%. To decide if this trend could continue, we decided to look at its weak fundamentals as they shape the long-term market trends. In this article, we decided to focus on Sunway Real Estate Investment Trust's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for Sunway 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 Sunway Real Estate Investment Trust is:

3.5% = RM164m ÷ RM4.7b (Based on the trailing twelve months to September 2020).

The 'return' is the income the business earned over the last year. That means that for every MYR1 worth of shareholders' equity, the company generated MYR0.03 in profit.

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 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.

A Side By Side comparison of Sunway Real Estate Investment Trust's Earnings Growth And 3.5% ROE

It is hard to argue that Sunway Real Estate Investment Trust's ROE is much good in and of itself. Further, we noted that the company's ROE is similar to the industry average of 3.9%. Therefore, it might not be wrong to say that the five year net income decline of 9.6% seen by Sunway Real Estate Investment Trust was possibly a result of the disappointing ROE.

From the 9.1% decline reported by the industry in the same period, we infer that Sunway Real Estate Investment Trust and its industry are both shrinking at a similar rate.

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. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Sunway Real Estate Investment Trust is trading on a high P/E or a low P/E, relative to its industry.

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

Sunway Real Estate Investment Trust seems to be paying out most of its income as dividends judging by its three-year median payout ratio of 73% (meaning, the company retains only 27% of profits). However, this is typical for REITs as they are often required by law to distribute most of their earnings. Accordingly, this likely explains why its earnings have been shrinking.

In addition, Sunway Real Estate Investment Trust has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth. Looking at the current analyst consensus data, we can see that the company's future payout ratio is expected to rise to 94% over the next three years. Still, forecasts suggest that Sunway Real Estate Investment Trust's future ROE will rise to 7.1% 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 would be extremely cautious before making any decision on Sunway Real Estate Investment Trust. The company has seen a lack of earnings growth as a result of retaining very little profits and whatever little it does retain, is being reinvested at a very low rate of return. Having said that, looking at current analyst estimates, we found that the company's earnings growth rate is expected to see a huge improvement. 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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