Is Industrial Logistics Properties Trust’s (NASDAQ:ILPT) 14.25% ROE Strong Compared To Its Industry?
Industrial Logistics Properties Trust (NASDAQ:ILPT) outperformed the Industrial REITs industry on the basis of its ROE – producing a higher 14.25% relative to the peer average of 7.45% over the past 12 months. While the impressive ratio tells us that ILPT has made significant profits from little equity capital, ROE doesn’t tell us if ILPT has borrowed debt to make this happen. We’ll take a closer look today at factors like financial leverage to determine whether ILPT’s ROE is actually sustainable. See our latest analysis for Industrial Logistics Properties Trust
What you must know about ROE
Firstly, Return on Equity, or ROE, is simply the percentage of last years’ earning against the book value of shareholders’ equity. An ROE of 14.25% implies $0.14 returned on every $1 invested. While a higher ROE is preferred in most cases, there are several other factors we should consider before drawing any conclusions.
Return on Equity = Net Profit ÷ Shareholders Equity
Returns are usually compared to costs to measure the efficiency of capital. Industrial Logistics Properties Trust’s cost of equity is 8.49%. This means Industrial Logistics Properties Trust returns enough to cover its own cost of equity, with a buffer of 5.75%. This sustainable practice implies that the company pays less for its capital than what it generates in return. ROE can be split up into three useful ratios: net profit margin, asset turnover, and financial leverage. This is called the Dupont Formula:
Dupont Formula
ROE = profit margin × asset turnover × financial leverage
ROE = (annual net profit ÷ sales) × (sales ÷ assets) × (assets ÷ shareholders’ equity)
ROE = annual net profit ÷ shareholders’ equity
Essentially, profit margin shows how much money the company makes after paying for all its expenses. The other component, asset turnover, illustrates how much revenue Industrial Logistics Properties Trust can make from its asset base. Finally, financial leverage will be our main focus today. It shows how much of assets are funded by equity and can show how sustainable the company’s capital structure is. Since ROE can be inflated by excessive debt, we need to examine Industrial Logistics Properties Trust’s debt-to-equity level. The debt-to-equity ratio currently stands at a balanced 142.19%, meaning the above-average ROE is due to its capacity to produce profit growth without a huge debt burden.
Next Steps:
ROE is one of many ratios which meaningfully dissects financial statements, which illustrates the quality of a company. Industrial Logistics Properties Trust’s ROE is impressive relative to the industry average and also covers its cost of equity. ROE is not likely to be inflated by excessive debt funding, giving shareholders more conviction in the sustainability of high returns. ROE is a helpful signal, but it is definitely not sufficient on its own to make an investment decision.
For Industrial Logistics Properties Trust, I’ve put together three fundamental factors you should further research:
Financial Health: Does it have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
Valuation: What is Industrial Logistics Properties Trust worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether Industrial Logistics Properties Trust is currently mispriced by the market.
Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of Industrial Logistics Properties Trust? Explore our interactive list of stocks with large growth potential to get an idea of what else is out there you may be missing!
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.
