It is hard to get excited after looking at Alexandria Real Estate Equities' (NYSE:ARE) recent performance, when its stock has declined 9.9% over the past three months. However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. In this article, we decided to focus on Alexandria Real Estate Equities' ROE.
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?
Return on equity 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 Alexandria Real Estate Equities is:
3.4% = US$654m ÷ US$19b (Based on the trailing twelve months to December 2021).
The 'return' is the amount earned after tax over the last twelve months. Another way to think of that is that for every $1 worth of equity, the company was able to earn $0.03 in profit.
Why Is ROE Important For Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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 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.
Alexandria Real Estate Equities' Earnings Growth And 3.4% ROE
It is quite clear that Alexandria Real Estate Equities' ROE is rather low. Not just that, even compared to the industry average of 6.2%, the company's ROE is entirely unremarkable. In spite of this, Alexandria Real Estate Equities was able to grow its net income considerably, at a rate of 44% in the last five years. We reckon that there could be other factors at play here. For instance, the company has a low payout ratio or is being managed efficiently.
We then compared Alexandria Real Estate Equities' net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 8.8% in the same period.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. What is ARE worth today? The intrinsic value infographic in our free research report helps visualize whether ARE is currently mispriced by the market.
Is Alexandria Real Estate Equities Using Its Retained Earnings Effectively?
Alexandria Real Estate Equities has a three-year median payout ratio of 50% (where it is retaining 50% of its income) which is not too low or not too high. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like Alexandria Real Estate Equities is reinvesting its earnings efficiently.
Additionally, Alexandria Real Estate Equities 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. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 55% of its profits over the next three years. As a result, Alexandria Real Estate Equities' ROE is not expected to change by much either, which we inferred from the analyst estimate of 3.0% for future ROE.
Overall, we feel that Alexandria Real Estate Equities certainly does have some positive factors to consider. Even in spite of the low rate of return, the company has posted impressive earnings growth as a result of reinvesting heavily into its business. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.
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.