Could The Market Be Wrong About First Industrial Realty Trust, Inc. (NYSE:FR) Given Its Attractive Financial Prospects?

It is hard to get excited after looking at First Industrial Realty Trust's (NYSE:FR) recent performance, when its stock has declined 4.3% over the past month. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Particularly, we will be paying attention to First Industrial Realty 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. Put another way, it reveals the company's success at turning shareholder investments into profits.

See our latest analysis for First Industrial Realty Trust

How Is ROE Calculated?

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 First Industrial Realty Trust is:

11% = US$213m ÷ US$1.9b (Based on the trailing twelve months to September 2020).

The 'return' is the yearly profit. One way to conceptualize this is that for each $1 of shareholders' capital it has, the company made $0.11 in profit.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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 First Industrial Realty Trust's Earnings Growth And 11% ROE

To begin with, First Industrial Realty Trust seems to have a respectable ROE. Especially when compared to the industry average of 5.4% the company's ROE looks pretty impressive. Probably as a result of this, First Industrial Realty Trust was able to see an impressive net income growth of 20% over the last five years. However, there could also be other causes behind this growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

Next, on comparing with the industry net income growth, we found that First Industrial Realty Trust's growth is quite high when compared to the industry average growth of 12% in the same period, which is great to see.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Has the market priced in the future outlook for FR? You can find out in our latest intrinsic value infographic research report.

Is First Industrial Realty Trust Efficiently Re-investing Its Profits?

First Industrial Realty Trust seems to be paying out most of its income as dividends judging by its three-year median payout ratio of 54%, meaning the company retains only 46% of its income. However, this is typical for REITs as they are often required by law to distribute most of their earnings. Regardless, this hasn't hampered its ability to grow as we saw earlier.

Moreover, First Industrial Realty Trust is determined to keep sharing its profits with shareholders which we infer from its long history of eight years of paying a dividend. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 51%. However, First Industrial Realty Trust's future ROE is expected to decline to 6.5% despite there being not much change anticipated in the company's payout ratio.

Conclusion

In total, we are pretty happy with First Industrial Realty Trust's performance. We are particularly impressed by the considerable earnings growth posted by the company, which was likely backed by its high ROE. 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. With that said, on studying the latest analyst forecasts, we found that while the company has seen growth in its past earnings, analysts expect its future earnings to shrink. 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. 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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