Does Mapletree Industrial Trust's (SGX:ME8U) Weak Fundamentals Mean That The Stock Could Move In The Opposite Direction?
Mapletree Industrial Trust's (SGX:ME8U) stock is up by 2.3% over the past month. Given that the markets usually pay for the long-term financial health of a company, we wonder if the current momentum in the share price will keep up, given that the company's financials don't look very promising. In this article, we decided to focus on Mapletree Industrial Trust's ROE.
Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. 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 Mapletree Industrial Trust
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 Mapletree Industrial Trust is:
8.2% = S$454m ÷ S$5.5b (Based on the trailing twelve months to September 2022).
The 'return' is the profit over the last twelve months. One way to conceptualize this is that for each SGD1 of shareholders' capital it has, the company made SGD0.08 in profit.
What Has ROE Got To Do With Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.
Mapletree Industrial Trust's Earnings Growth And 8.2% ROE
On the face of it, Mapletree Industrial Trust's ROE is not much to talk about. However, its ROE is similar to the industry average of 7.0%, so we won't completely dismiss the company. On the other hand, Mapletree Industrial Trust reported a fairly low 4.2% net income growth over the past five years. Bear in mind, the company's ROE is not very high . Hence, this does provide some context to low earnings growth seen by the company.
Next, on comparing with the industry net income growth, we found that Mapletree Industrial Trust's reported growth was lower than the industry growth of 5.9% in the same period, which is not something we like to see.
Earnings growth is an important metric to consider when valuing a stock. 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. What is ME8U worth today? The intrinsic value infographic in our free research report helps visualize whether ME8U is currently mispriced by the market.
Is Mapletree Industrial Trust Making Efficient Use Of Its Profits?
Mapletree Industrial Trust seems to be paying out most of its income as dividends judging by its three-year median payout ratio of 89% (or a retention ratio of 11%). However, this is typical for REITs as they are often required by law to distribute most of their earnings. So this probably explains the low earnings growth seen by the company.
In addition, Mapletree Industrial 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 98% of its profits over the next three years. Therefore, the company's future ROE is also not expected to change by much with analysts predicting an ROE of 7.6%.
Conclusion
In total, we would have a hard think before deciding on any investment action concerning Mapletree Industrial Trust. Because the company is not reinvesting much into the business, and given the low ROE, it's not surprising to see the lack or absence of growth in its earnings. 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 latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.
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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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