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Is Charter Hall Retail Real Estate Investment Trust's (ASX:CQR) Recent Stock Performance Influenced By Its Financials In Any Way?

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Most readers would already know that Charter Hall Retail Real Estate Investment Trust's (ASX:CQR) stock increased by 2.7% 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 Charter Hall Retail Real Estate Investment Trust's ROE.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View our latest analysis for Charter Hall Retail Real Estate Investment Trust

How Is ROE Calculated?

The formula for return on equity is:

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:

13% = AU$291m ÷ AU$2.3b (Based on the trailing twelve months to June 2021).

The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every A$1 worth of equity, the company was able to earn A$0.13 in profit.

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.

Charter Hall Retail Real Estate Investment Trust's Earnings Growth And 13% ROE

To start with, Charter Hall Retail Real Estate Investment Trust's ROE looks acceptable. Even when compared to the industry average of 12% the company's ROE looks quite decent. As you might expect, the 18% net income decline reported by Charter Hall Retail Real Estate Investment Trust is a bit of a surprise. So, there might be some other aspects that could explain this. For example, it could be that the company has a high payout ratio or the business has allocated capital poorly, for instance.

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 0.1% in the same period.

past-earnings-growth
past-earnings-growth

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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 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 82% (meaning, the company retains only 18% of profits). However, this is typical for REITs as they are often required by law to distribute most of their earnings. So this probably explains the company's shrinking earnings.

Additionally, Charter Hall Retail Real Estate Investment Trust has paid dividends over a period of at least ten years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth. 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 89%. Still, forecasts suggest that Charter Hall Retail Real Estate Investment Trust's future ROE will drop to 6.9% even though the the company's payout ratio is not expected to change by much.

Summary

In total, it does look like Charter Hall Retail Real Estate Investment Trust has some positive aspects to its business. Yet, the low earnings growth is a bit concerning, especially given that the company has a high rate of return. Investors could have benefitted from the high ROE, had the company been reinvesting more of its earnings. As discussed earlier, the company is retaining a small portion of its profits. Having said that, we studied the latest analyst forecasts, and found that analysts are expecting the company's earnings growth to improve slightly. Sure enough, this could bring some relief to shareholders. 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. 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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