Declining Stock and Decent Financials: Is The Market Wrong About Ascendas Real Estate Investment Trust (SGX:A17U)?

By
Simply Wall St
Published
October 19, 2020
SGX:A17U

It is hard to get excited after looking at Ascendas Real Estate Investment Trust's (SGX:A17U) recent performance, when its stock has declined 4.2% over the past three months. However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. In this article, we decided to focus on Ascendas Real Estate Investment Trust's ROE.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View our latest analysis for Ascendas Real Estate Investment Trust

How Do You Calculate Return On Equity?

The formula for return on equity is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Ascendas Real Estate Investment Trust is:

6.2% = S$514m ÷ S$8.3b (Based on the trailing twelve months to June 2020).

The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each SGD1 of shareholders' capital it has, the company made SGD0.06 in profit.

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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. 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.

Ascendas Real Estate Investment Trust's Earnings Growth And 6.2% ROE

When you first look at it, Ascendas Real Estate Investment Trust's ROE doesn't look that attractive. Although a closer study shows that the company's ROE is higher than the industry average of 5.2% which we definitely can't overlook. This certainly adds some context to Ascendas Real Estate Investment Trust's moderate 7.6% net income growth seen over the past five years. Bear in mind, the company does have a moderately low ROE. It is just that the industry ROE is lower. Hence there might be some other aspects that are causing earnings to grow. For example, it is possible that the broader industry is going through a high growth phase, or that the company has a low payout ratio.

Next, on comparing Ascendas Real Estate Investment Trust's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 6.4% in the same period.

past-earnings-growth
SGX:A17U Past Earnings Growth October 19th 2020

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. What is A17U worth today? The intrinsic value infographic in our free research report helps visualize whether A17U is currently mispriced by the market.

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

Ascendas Real Estate Investment Trust seems to be paying out most of its income as dividends judging by its three-year median payout ratio of 82%, meaning the company retains only 18% 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 by a fair bit, as we saw above.

Additionally, Ascendas 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. Looking at the current analyst consensus data, we can see that the company's future payout ratio is expected to rise to 111% over the next three years. Regardless, the ROE is not expected to change much for the company despite the higher expected payout ratio.

Summary

In total, it does look like Ascendas Real Estate Investment Trust has some positive aspects to its business. 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 growth is expected to slow down. 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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