Is Mapletree Industrial Trust's (SGX:ME8U) Recent Performancer Underpinned By Weak Financials?

It is hard to get excited after looking at Mapletree Industrial Trust's (SGX:ME8U) recent performance, when its stock has declined 4.9% over the past three months. Given that stock prices are usually driven by a company’s fundamentals over the long term, which in this case look pretty weak, we decided to study the company's key financial indicators. Particularly, we will be paying attention to Mapletree Industrial Trust's ROE today.

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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

See our latest analysis for Mapletree Industrial 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 Mapletree Industrial Trust is:

4.6% = S$236m ÷ S$5.1b (Based on the trailing twelve months to December 2021).

The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each SGD1 of shareholders' capital it has, the company made SGD0.05 in profit.

What Is The Relationship Between ROE And 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

Mapletree Industrial Trust's Earnings Growth And 4.6% ROE

When you first look at it, Mapletree Industrial Trust's ROE doesn't look that attractive. Yet, a closer study shows that the company's ROE is similar to the industry average of 5.4%. But Mapletree Industrial Trust saw a five year net income decline of 2.3% over the past five years. Bear in mind, the company does have a slightly low ROE. Therefore, the decline in earnings could also be the result of this.

Next, on comparing with the industry net income growth, we found that Mapletree Industrial Trust's earnings seems to be shrinking at a similar rate as the industry which shrunk at a rate of a rate of 2.3% in the same period.

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). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. What is ME8U worth today? The intrinsic value infographic in our free research report helps visualize whether ME8U is currently mispriced by the market.

Is Mapletree Industrial Trust Using Its Retained Earnings Effectively?

Mapletree Industrial Trust seems to be paying out most of its income as dividends judging by its three-year median payout ratio of 89% (meaning, the company retains only 11% of profits). However, this is typical for REITs as they are often required by law to distribute most of their earnings. So this probably explains the company's shrinking earnings.

Moreover, Mapletree Industrial Trust has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 101% of its profits over the next three years. Still, forecasts suggest that Mapletree Industrial Trust's future ROE will rise to 7.8% even though the the company's payout ratio is not expected to change by much.

Summary

On the whole, Mapletree Industrial Trust's performance is quite a big let-down. Because the company is not reinvesting much into the business, and given the low ROE, it's not surprising to see the lack or absence of growth in its earnings. With that said, we studied the latest analyst forecasts and found that while the company has shrunk its earnings in the past, analysts expect its earnings to grow in the future. 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. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.