Are Alexandria Real Estate Equities, Inc.'s (NYSE:ARE) Fundamentals Good Enough to Warrant Buying Given The Stock's Recent Weakness?
With its stock down 15% over the past three months, it is easy to disregard Alexandria Real Estate Equities (NYSE:ARE). But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. 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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.
See our latest analysis for Alexandria Real Estate Equities
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:
2.0% = US$416m ÷ US$20b (Based on the trailing twelve months to June 2022).
The 'return' is the income the business earned over the last year. That means that for every $1 worth of shareholders' equity, the company generated $0.02 in profit.
Why Is ROE Important For Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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.
Alexandria Real Estate Equities' Earnings Growth And 2.0% ROE
As you can see, Alexandria Real Estate Equities' ROE looks pretty weak. Not just that, even compared to the industry average of 6.6%, the company's ROE is entirely unremarkable. Despite this, surprisingly, Alexandria Real Estate Equities saw an exceptional 27% net income growth over the past five years. We believe that there might be other aspects that are positively influencing the company's earnings 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 Alexandria Real Estate Equities' growth is quite high when compared to the industry average growth of 11% 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). This then helps them determine if the stock is placed for a bright or bleak future. Has the market priced in the future outlook for ARE? You can find out in our latest intrinsic value infographic research report.
Is Alexandria Real Estate Equities Making Efficient Use Of Its Profits?
Alexandria Real Estate Equities has a very high three-year median payout ratio of 51%. This means that it has only 49% of its income left to reinvest into its business. However, it's not unusual to see a REIT with such a high payout ratio mainly due to statutory requirements. Despite this, the company's earnings have grown significantly as we saw above.
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. Our latest analyst data shows that the future payout ratio of the company is expected to rise to 62% over the next three years. However, Alexandria Real Estate Equities' future ROE is expected to rise to 3.0% despite the expected increase in the company's payout ratio. We infer that there could be other factors that could be driving the anticipated growth in the company's ROE.
Conclusion
Overall, we feel that Alexandria Real Estate Equities certainly does have some positive factors to consider. Namely, its high earnings growth. We do however feel that the earnings growth number could have been even higher, had the company been reinvesting more of its earnings and paid out less dividends. On studying current analyst estimates, we found that analysts expect the company to continue its recent growth streak. 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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
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