Freehold Royalties Ltd.'s (TSE:FRU) Stock Been Rising: Are Strong Financials Guiding The Market?
Freehold Royalties' (TSE:FRU) stock is up by 1.8% over the past week. Since the market usually pay for a company’s long-term financial health, we decided to study the company’s fundamentals to see if they could be influencing the market. Particularly, we will be paying attention to Freehold Royalties' ROE today.
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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
See our latest analysis for Freehold Royalties
How Is ROE Calculated?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Freehold Royalties is:
15% = CA$138m ÷ CA$936m (Based on the trailing twelve months to September 2023).
The 'return' is the yearly profit. Another way to think of that is that for every CA$1 worth of equity, the company was able to earn CA$0.15 in profit.
Why Is ROE Important For Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. 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 all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.
Freehold Royalties' Earnings Growth And 15% ROE
To start with, Freehold Royalties' ROE looks acceptable. Further, the company's ROE is similar to the industry average of 17%. This certainly adds some context to Freehold Royalties' exceptional 67% net income growth seen over the past five years. We reckon that there could also be other factors at play here. 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.
As a next step, we compared Freehold Royalties' net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 42%.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. Is Freehold Royalties fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is Freehold Royalties Making Efficient Use Of Its Profits?
The high three-year median payout ratio of 84% (implying that it keeps only 16% of profits) for Freehold Royalties suggests that the company's growth wasn't really hampered despite it returning most of the earnings to its shareholders.
Additionally, Freehold Royalties 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 drop to 61% over the next three years.
Conclusion
Overall, we are quite pleased with Freehold Royalties' performance. Especially the high ROE, Which has contributed to the impressive growth seen in earnings. Despite the company reinvesting only a small portion of its profits, it still has managed to grow its earnings so that is appreciable. With that said, on studying the latest analyst forecasts, we found that while the company has seen growth in its past earnings, analysts expect its future earnings to shrink. 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.
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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.
