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Mid-America Apartment Communities, Inc.'s (NYSE:MAA) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?

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With its stock down 21% over the past three months, it is easy to disregard Mid-America Apartment Communities (NYSE:MAA). However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Particularly, we will be paying attention to Mid-America Apartment Communities' 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. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for Mid-America Apartment Communities

How To 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:

10% = US$615m ÷ US$6.1b (Based on the trailing twelve months to March 2022).

The 'return' is the amount earned after tax over the last twelve months. That means that for every $1 worth of shareholders' equity, the company generated $0.10 in profit.

What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.

Mid-America Apartment Communities' Earnings Growth And 10% ROE

At first glance, Mid-America Apartment Communities seems to have a decent ROE. Especially when compared to the industry average of 6.5% the company's ROE looks pretty impressive. This certainly adds some context to Mid-America Apartment Communities' decent 14% net income growth seen over the past five years.

As a next step, we compared Mid-America Apartment Communities' 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 11%.

past-earnings-growth
past-earnings-growth

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. Doing so will help them establish if the stock's future looks promising or ominous. What is MAA worth today? The intrinsic value infographic in our free research report helps visualize whether MAA is currently mispriced by the market.

Is Mid-America Apartment Communities Efficiently Re-investing Its Profits?

Mid-America Apartment Communities has a high three-year median payout ratio of 59%. This means that it has only 41% of its income left to reinvest into its business. However, it's not unusual to see a REIT with such a high payout ratio mainly due to statutory requirements. In spite of this, the company was able to grow its earnings by a fair bit, as we saw above.

Moreover, Mid-America Apartment Communities is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 57% of its profits over the next three years. Accordingly, forecasts suggest that Mid-America Apartment Communities' future ROE will be 9.5% which is again, similar to the current ROE.

Summary

In total, we are pretty happy with Mid-America Apartment Communities' performance. We are particularly impressed by the considerable earnings growth posted by the company, which was likely backed by its high ROE. While the company is paying out most of its earnings as dividends, it has been able to grow its earnings in spite of it, so that's probably a good sign. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.