Investing In Property Through Goodman Group (ASX:GMG)
Goodman Group is a AU$19.41b large-cap, real estate investment trust (REIT) based in Sydney, Australia. REITs own and operate income-generating property and adhere to a different set of regulations. This impacts how GMG’s business operates and also how we should analyse its stock. I’ll take you through some of the key metrics you should use in order to properly assess GMG.
View our latest analysis for Goodman Group
Funds from Operations (FFO) is a higher quality measure of GMG’s earnings compared to net income. This term is very common in the REIT investing world as it provides a cleaner look at its cash flow from daily operations by excluding impact of one-off activities or non-cash items such as depreciation. For GMG, its FFO of AU$1.16b makes up 111% of its gross profit, which means the majority of its earnings are high-quality and recurring.
In order to understand whether GMG has a healthy balance sheet, we have to look at a metric called FFO-to-total debt. This tells us how long it will take GMG to pay off its debt using its income from its main business activities, and gives us an insight into GMG’s ability to service its borrowings. With a ratio of 37.7%, the credit rating agency Standard & Poor would consider this as significant risk. This would take GMG 2.65 years to pay off using operating income alone, which is reasonable, given that long term debt is a multi-year commitment.
Next, interest coverage ratio shows how many times GMG’s earnings can cover its annual interest payments. Usually the ratio is calculated using EBIT, but for REITs, it’s better to use FFO divided by net interest. This is similar to the above concept, but looks at the nearer-term obligations. With an interest coverage ratio of 16.54x, its safe to say GMG is producing more than enough funds to cover its upcoming payments.
I also use FFO to look at GMG’s valuation relative to other REITs in Australia by using the price-to-FFO metric. This is conceptually the same as the price-to-earnings (PE) ratio, but as previously mentioned, FFO is more suitable. GMG’s price-to-FFO is 16.47x, compared to the long-term industry average of 16.5x, meaning that it is fairly valued.
Next Steps:
In this article, I’ve taken a look at Funds from Operations using various metrics, but it is certainly not sufficient to derive an investment decision based on this value alone. Goodman Group can bring about diversification for your portfolio, but before you decide to invest, take a look at the other aspects you must consider before investing:
Future Outlook: What are well-informed industry analysts predicting for GMG’s future growth? Take a look at our free research report of analyst consensus for GMG’s outlook.
Valuation: What is GMG 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 GMG is currently mispriced by the market.
Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see past 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. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
