Sabana Industrial Real Estate Investment Trust's (SGX:M1GU) Stock Is Going Strong: Have Financials A Role To Play?
Most readers would already be aware that Sabana Industrial Real Estate Investment Trust's (SGX:M1GU) stock increased significantly by 8.3% over the past month. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. In this article, we decided to focus on Sabana Industrial Real Estate Investment Trust's ROE.
Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.
View our latest analysis for Sabana Industrial Real Estate Investment Trust
How Is ROE Calculated?
Return on equity can be calculated by using the formula:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Sabana Industrial Real Estate Investment Trust is:
9.0% = S$53m ÷ S$586m (Based on the trailing twelve months to December 2022).
The 'return' is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each SGD1 of shareholders' capital it has, the company made SGD0.09 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. 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 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.
Sabana Industrial Real Estate Investment Trust's Earnings Growth And 9.0% ROE
At first glance, Sabana Industrial Real Estate Investment Trust's ROE doesn't look very promising. However, the fact that the company's ROE is higher than the average industry ROE of 6.0%, is definitely interesting. Particularly, the substantial 21% net income growth seen by Sabana Industrial Real Estate Investment Trust over the past five years is impressive . Bear in mind, the company does have a moderately low ROE. It is just that the industry ROE is lower. Hence, there might be some other aspects that are causing earnings to grow. Such as- high earnings retention or the company belonging to a high growth industry.
Next, on comparing with the industry net income growth, we found that Sabana Industrial Real Estate Investment Trust's growth is quite high when compared to the industry average growth of 1.6% in the same period, which is great to see.
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. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Sabana Industrial Real Estate Investment Trust is trading on a high P/E or a low P/E, relative to its industry.
Is Sabana Industrial Real Estate Investment Trust Efficiently Re-investing Its Profits?
Sabana Industrial Real Estate Investment Trust seems to be paying out most of its income as dividends judging by its three-year median payout ratio of 52%, meaning the company retains only 48% of its income. However, this is typical for REITs as they are often required by law to distribute most of their earnings. Regardless, this hasn't hampered its ability to grow as we saw earlier.
Additionally, Sabana Industrial Real Estate Investment Trust has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Looking at the current analyst consensus data, we can see that the company's future payout ratio is expected to rise to 106% over the next three years. Therefore, the expected rise in the payout ratio explains why the company's ROE is expected to decline to 5.4% over the same period.
Summary
Overall, we feel that Sabana Industrial Real Estate Investment Trust certainly does have some positive factors to consider. Namely, its significant earnings growth, to which its moderate rate of return likely contributed. 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. That being so, according to the latest industry analyst forecasts, the company's earnings are expected to shrink in the future. 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.
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