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Americold Realty Trust's (NYSE:COLD) Has Had A Decent Run On The Stock market: Are Fundamentals In The Driver's Seat?

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Americold Realty Trust's (NYSE:COLD) stock is up by 2.5% over the past month. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. In this article, we decided to focus on Americold Realty Trust's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

See our latest analysis for Americold Realty Trust

How Do You 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 Americold Realty Trust is:

3.8% = US$76m ÷ US$2.0b (Based on the trailing twelve months to March 2020).

The 'return' is the yearly profit. That means that for every $1 worth of shareholders' equity, the company generated $0.04 in profit.

What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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.

Americold Realty Trust's Earnings Growth And 3.8% ROE

It is hard to argue that Americold Realty Trust's ROE is much good in and of itself. Not just that, even compared to the industry average of 5.5%, the company's ROE is entirely unremarkable. Despite this, surprisingly, Americold Realty Trust saw an exceptional 77% net income growth over the past five years. Therefore, there could be other reasons 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.

We then compared Americold Realty Trust's 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 13% in the same period.

NYSE:COLD Past Earnings Growth July 9th 2020
NYSE:COLD Past Earnings Growth July 9th 2020

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. What is COLD worth today? The intrinsic value infographic in our free research report helps visualize whether COLD is currently mispriced by the market.

Is Americold Realty Trust Using Its Retained Earnings Effectively?

Americold Realty Trust seems to be paying out most of its income as dividends judging by its three-year median payout ratio of 72%, meaning the company retains only 28% of its income. However, this is typical for REITs as they are often required by law to distribute most of their earnings. In spite of this, the company was able to grow its earnings significantly, as we saw above.

While Americold Realty Trust has been growing its earnings, it only recently started to pay dividends which likely means that the company decided to impress new and existing shareholders with a dividend. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to drop to 0.3% over the next three years. The fact that the company's ROE is expected to rise to 7.5% over the same period is explained by the drop in the payout ratio.

Conclusion

In total, it does look like Americold Realty Trust has some positive aspects to its business. While no doubt its earnings growth is pretty substantial, we do feel that the reinvestment rate is pretty low, meaning, the earnings growth number could have been significantly higher had the company been retaining more of its profits. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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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