Mapletree Logistics Trust (SGX:M44U) has had a great run on the share market with its stock up by a significant 5.8% over the last month. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. Particularly, we will be paying attention to Mapletree Logistics 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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.
How To 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 Mapletree Logistics Trust is:
7.9% = S$395m ÷ S$5.0b (Based on the trailing twelve months to September 2020).
The 'return' is the amount earned after tax over the last twelve months. That means that for every SGD1 worth of shareholders' equity, the company generated SGD0.08 in profit.
Why Is ROE Important For Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. 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 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 Mapletree Logistics Trust's Earnings Growth And 7.9% ROE
On the face of it, Mapletree Logistics Trust's ROE is not much to talk about. However, the fact that the company's ROE is higher than the average industry ROE of 5.4%, is definitely interesting. Consequently, this likely laid the ground for the decent growth of 19% seen over the past five years by Mapletree Logistics Trust. That being said, the company does have a slightly low ROE to begin with, just that it is higher than the industry average. So there might well be other reasons for the earnings to grow. E.g the company has a low payout ratio or could belong to a high growth industry.
Next, on comparing with the industry net income growth, we found that Mapletree Logistics Trust's growth is quite high when compared to the industry average growth of 7.6% in the same period, which is great to see.
Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. 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 Mapletree Logistics Trust is trading on a high P/E or a low P/E, relative to its industry.
Is Mapletree Logistics Trust Efficiently Re-investing Its Profits?
Mapletree Logistics Trust seems to be paying out most of its income as dividends judging by its three-year median payout ratio of 76%, meaning the company retains only 24% 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.
Besides, Mapletree Logistics Trust has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to rise to 120% over the next three years. Regardless, the ROE is not expected to change much for the company despite the higher expected payout ratio.
On the whole, we do feel that Mapletree Logistics Trust has some positive attributes. Namely, its significant earnings growth, to which its moderate rate of return likely contributed. While the company is paying out most of its earnings as dividends, it has been able to grow its earnings in spite of it, so that's probably a good sign. 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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