Mid-America Apartment Communities, Inc.'s (NYSE:MAA) Stock Is Going Strong: Have Financials A Role To Play?
Mid-America Apartment Communities' (NYSE:MAA) stock is up by a considerable 11% over the past three months. As most would know, fundamentals are what usually guide market price movements over the long-term, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. Particularly, we will be paying attention to Mid-America Apartment Communities' ROE today.
Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Put another way, it reveals the company's success at turning shareholder investments into profits.
View our latest analysis for Mid-America Apartment Communities
How Is ROE Calculated?
The formula for return on equity 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:
7.3% = US$446m ÷ US$6.1b (Based on the trailing twelve months to September 2021).
The 'return' is the yearly profit. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.07.
What Has ROE Got To Do With Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. 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 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.
A Side By Side comparison of Mid-America Apartment Communities' Earnings Growth And 7.3% ROE
On the face of it, Mid-America Apartment Communities' ROE is not much to talk about. However, its ROE is similar to the industry average of 6.6%, so we won't completely dismiss the company. Even so, Mid-America Apartment Communities has shown a fairly decent growth in its net income which grew at a rate of 9.2%. Given the slightly low ROE, it is likely that there could be some other aspects that are driving this growth. 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 Mid-America Apartment Communities' net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 9.0% in the same period.
Earnings growth is a huge factor in stock valuation. 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 MAA fairly valued? This infographic on the company's intrinsic value has everything you need to know.
Is Mid-America Apartment Communities Using Its Retained Earnings Effectively?
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.
Besides, Mid-America Apartment Communities has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 56%. Accordingly, forecasts suggest that Mid-America Apartment Communities' future ROE will be 7.2% which is again, similar to the current ROE.
Conclusion
In total, it does look like Mid-America Apartment Communities has some positive aspects to its business. While no doubt its earnings growth is pretty substantial, we do feel that the reinvestment rate is pretty low, meaning, the earnings growth number could have been significantly higher had the company been retaining more of its profits. On studying current analyst estimates, we found that analysts expect the company to continue its recent growth streak. 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.
