Parkway Life Real Estate Investment Trust (SGX:C2PU) On An Uptrend: Could Fundamentals Be Driving The Stock?

Parkway Life Real Estate Investment Trust's (SGX:C2PU) stock is up by 8.1% over the past three months. 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 Parkway Life Real Estate Investment Trust's ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for Parkway Life Real Estate Investment Trust

How Is ROE Calculated?

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 Parkway Life Real Estate Investment Trust is:

7.4% = S$87m ÷ S$1.2b (Based on the trailing twelve months to December 2020).

The 'return' is the amount earned after tax over the last twelve months. Another way to think of that is that for every SGD1 worth of equity, the company was able to earn SGD0.07 in profit.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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 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 Parkway Life Real Estate Investment Trust's Earnings Growth And 7.4% ROE

When you first look at it, Parkway Life Real Estate Investment Trust's ROE doesn't look that attractive. However, the fact that the company's ROE is higher than the average industry ROE of 5.0%, is definitely interesting. This probably goes some way in explaining Parkway Life Real Estate Investment Trust's moderate 12% 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.

As a next step, we compared Parkway Life Real Estate Investment Trust's net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 12% in the same period.

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. This then helps them determine if the stock is placed for a bright or bleak future. 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 Parkway Life Real Estate Investment Trust is trading on a high P/E or a low P/E, relative to its industry.

Is Parkway Life Real Estate Investment Trust Using Its Retained Earnings Effectively?

Parkway Life Real Estate Investment Trust seems to be paying out most of its income as dividends judging by its three-year median payout ratio of 90%, meaning the company retains only 10% 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.

Moreover, Parkway Life Real Estate Investment Trust is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 98%. Accordingly, forecasts suggest that Parkway Life Real Estate Investment Trust's future ROE will be 7.7% which is again, similar to the current ROE.

Summary

On the whole, we do feel that Parkway Life Real Estate Investment Trust has some positive attributes. Specifically, its respectable ROE which likely led to the considerable growth in earnings. Yet, the company is retaining a small portion of its profits. Which means that the company has been able to grow its earnings in spite of it, so that's not too bad. 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 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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