Is Charter Hall Retail Real Estate Investment Trust's (ASX:CQR) Recent Performancer Underpinned By Weak Financials?
Charter Hall Retail Real Estate Investment Trust (ASX:CQR) has had a rough three months with its share price down 3.2%. To decide if this trend could continue, we decided to look at its weak fundamentals as they shape the long-term market trends. Specifically, we decided to study Charter Hall Retail Real Estate Investment Trust's ROE in this article.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
See our latest analysis for Charter Hall Retail Real Estate Investment Trust
How Do You 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 Charter Hall Retail Real Estate Investment Trust is:
2.8% = AU$60m ÷ AU$2.2b (Based on the trailing twelve months to December 2020).
The 'return' is the profit over the last twelve months. That means that for every A$1 worth of shareholders' equity, the company generated A$0.03 in profit.
Why Is ROE Important For Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. 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.
A Side By Side comparison of Charter Hall Retail Real Estate Investment Trust's Earnings Growth And 2.8% ROE
As you can see, Charter Hall Retail Real Estate Investment Trust's ROE looks pretty weak. Even compared to the average industry ROE of 6.7%, the company's ROE is quite dismal. For this reason, Charter Hall Retail Real Estate Investment Trust's five year net income decline of 32% is not surprising given its lower ROE. We reckon that there could also be other factors at play here. For example, the business has allocated capital poorly, or that the company has a very high payout ratio.
That being said, we compared Charter Hall Retail Real Estate Investment Trust's performance with the industry and were concerned when we found that while the company has shrunk its earnings, the industry has grown its earnings at a rate of 5.5% in the same period.
Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. What is CQR worth today? The intrinsic value infographic in our free research report helps visualize whether CQR is currently mispriced by the market.
Is Charter Hall Retail Real Estate Investment Trust Making Efficient Use Of Its Profits?
Charter Hall Retail Real Estate Investment Trust seems to be paying out most of its income as dividends judging by its three-year median payout ratio of 93% (meaning, the company retains only 6.8% of profits). However, this is typical for REITs as they are often required by law to distribute most of their earnings. Accordingly, this likely explains why its earnings have been shrinking.
In addition, Charter Hall Retail Real Estate Investment Trust has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 89% of its profits over the next three years. Regardless, the future ROE for Charter Hall Retail Real Estate Investment Trust is predicted to rise to 7.4% despite there being not much change expected in its payout ratio.
Conclusion
In total, we would have a hard think before deciding on any investment action concerning Charter Hall Retail Real Estate Investment Trust. As a result of its low ROE and lack of mich reinvestment into the business, the company has seen a disappointing earnings growth rate. With that said, we studied the latest analyst forecasts and found that while the company has shrunk its earnings in the past, analysts expect its earnings to grow in the future. 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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