Can Mid-America Apartment Communities, Inc.'s (NYSE:MAA) Weak Financials Pull The Plug On The Stock's Current Momentum On Its Share Price?
Most readers would already be aware that Mid-America Apartment Communities' (NYSE:MAA) stock increased significantly by 23% over the past three months. However, in this article, we decided to focus on its weak fundamentals, as long-term financial performance of a business is what ultimatley dictates market outcomes. In this article, we decided to focus on Mid-America Apartment Communities' ROE.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
Check out our latest analysis for Mid-America Apartment Communities
How Do You Calculate Return On Equity?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Mid-America Apartment Communities is:
4.6% = US$275m ÷ US$6.0b (Based on the trailing twelve months to March 2021).
The 'return' is the yearly profit. Another way to think of that is that for every $1 worth of equity, the company was able to earn $0.05 in profit.
Why Is ROE Important For Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.
A Side By Side comparison of Mid-America Apartment Communities' Earnings Growth And 4.6% ROE
At first glance, Mid-America Apartment Communities' ROE doesn't look very promising. Yet, a closer study shows that the company's ROE is similar to the industry average of 5.1%. On the other hand, Mid-America Apartment Communities reported a fairly low 4.4% net income growth over the past five years. Bear in mind, the company's ROE is not very high . So this could also be one of the reasons behind the company's low growth in earnings.
We then compared Mid-America Apartment Communities' net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 9.9% in the same period, which is a bit concerning.
Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Has the market priced in the future outlook for MAA? You can find out in our latest intrinsic value infographic research report.
Is Mid-America Apartment Communities Efficiently Re-investing Its Profits?
Mid-America Apartment Communities seems to be paying out most of its income as dividends judging by its three-year median payout ratio of 59% (or a retention ratio of 41%). 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.
Moreover, Mid-America Apartment Communities has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 65% of its profits over the next three years. However, Mid-America Apartment Communities' ROE is predicted to rise to 5.6% despite there being no anticipated change in its payout ratio.
Summary
Overall, we would be extremely cautious before making any decision on Mid-America Apartment Communities. 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. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.
This article by Simply Wall St is general in nature. 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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