Stock Analysis

Is Safehold Inc.'s (NYSE:SAFE) 4.4% ROE Strong Compared To Its Industry?

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NYSE:SAFE
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While some investors are already well versed in financial metrics (hat tip), this article is for those who would like to learn about Return On Equity (ROE) and why it is important. By way of learning-by-doing, we'll look at ROE to gain a better understanding of Safehold Inc. (NYSE:SAFE).

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.

View our latest analysis for Safehold

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 Safehold is:

4.4% = US$55m ÷ US$1.2b (Based on the trailing twelve months to September 2020).

The 'return' is the yearly profit. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.04.

Does Safehold Have A Good ROE?

One simple way to determine if a company has a good return on equity is to compare it to the average for its industry. However, this method is only useful as a rough check, because companies do differ quite a bit within the same industry classification. You can see in the graphic below that Safehold has an ROE that is fairly close to the average for the REITs industry (5.4%).

roe
NYSE:SAFE Return on Equity January 4th 2021

That isn't amazing, but it is respectable. While at least the ROE is not lower than the industry, its still worth checking what role the company's debt plays as high debt levels relative to equity may also make the ROE appear high. If so, this increases its exposure to financial risk. You can see the 2 risks we have identified for Safehold by visiting our risks dashboard for free on our platform here.

How Does Debt Impact ROE?

Most companies need money -- from somewhere -- to grow their profits. That cash can come from retained earnings, issuing new shares (equity), or debt. In the first and second cases, the ROE will reflect this use of cash for investment in the business. In the latter case, the debt used for growth will improve returns, but won't affect the total equity. In this manner the use of debt will boost ROE, even though the core economics of the business stay the same.

Combining Safehold's Debt And Its 4.4% Return On Equity

Safehold does use a high amount of debt to increase returns. It has a debt to equity ratio of 1.21. The combination of a rather low ROE and significant use of debt is not particularly appealing. Investors should think carefully about how a company might perform if it was unable to borrow so easily, because credit markets do change over time.

Conclusion

Return on equity is useful for comparing the quality of different businesses. A company that can achieve a high return on equity without debt could be considered a high quality business. If two companies have around the same level of debt to equity, and one has a higher ROE, I'd generally prefer the one with higher ROE.

But when a business is high quality, the market often bids it up to a price that reflects this. The rate at which profits are likely to grow, relative to the expectations of profit growth reflected in the current price, must be considered, too. So you might want to check this FREE visualization of analyst forecasts for the company.

If you would prefer check out another company -- one with potentially superior financials -- then do not miss this free list of interesting companies, that have HIGH return on equity and low debt.

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What are the risks and opportunities for Safehold?

Safehold Inc. (NYSE: SAFE) is revolutionizing real estate ownership by providing a new and better way for owners to unlock the value of the land beneath their buildings.

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Rewards

  • Price-To-Earnings ratio (15.7x) is below the REITs industry average (27x)

  • Earnings are forecast to grow 13.17% per year

  • Earnings grew by 101% over the past year

Risks

  • Interest payments are not well covered by earnings

  • Shareholders have been diluted in the past year

  • Large one-off items impacting financial results

View all Risks and Rewards

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