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SL Green Realty Corp.'s (NYSE:SLG) Stock's Been Going Strong: Could Weak Financials Mean The Market Will Correct Its Share Price?

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Most readers would already be aware that SL Green Realty's (NYSE:SLG) stock increased significantly by 12% over the past three months. We, however wanted to have a closer look at its key financial indicators as the markets usually pay for long-term fundamentals, and in this case, they don't look very promising. Particularly, we will be paying attention to SL Green Realty's ROE today.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. Put another way, it reveals the company's success at turning shareholder investments into profits.

View our latest analysis for SL Green Realty

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 SL Green Realty is:

5.2% = US$284m ÷ US$5.5b (Based on the trailing twelve months to March 2021).

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 $0.05 in profit.

Why Is ROE Important For 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.

SL Green Realty's Earnings Growth And 5.2% ROE

On the face of it, SL Green Realty's ROE is not much to talk about. However, given that the company's ROE is similar to the average industry ROE of 5.1%, we may spare it some thought. However, SL Green Realty has seen a flattish net income growth over the past five years, which is not saying much. Bear in mind, the company's ROE is not very high. Hence, this provides some context to the flat earnings growth seen by the company.

Next, on comparing with the industry net income growth, we found that SL Green Realty's reported growth was lower than the industry growth of 9.9% in the same period, which is not something we like to see.

past-earnings-growth
past-earnings-growth

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. What is SLG worth today? The intrinsic value infographic in our free research report helps visualize whether SLG is currently mispriced by the market.

Is SL Green Realty Using Its Retained Earnings Effectively?

SL Green Realty has a very high three-year median payout ratio of 51% (or a retention ratio of 49%). However, it's not unusual to see a REIT with such a high payout ratio mainly due to statutory requirements. So this probably explains the absence of growth in earnings.

Additionally, SL Green Realty has paid dividends over a period of at least ten years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 52%. However, SL Green Realty's future ROE is expected to decline to 2.9% despite there being not much change anticipated in the company's payout ratio.

Conclusion

Overall, we would be extremely cautious before making any decision on SL Green Realty. 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 company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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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