Most readers would already be aware that Weingarten Realty Investors' (NYSE:WRI) stock increased significantly by 26% 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 Weingarten Realty Investors' 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.
How To Calculate Return On Equity?
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 Weingarten Realty Investors is:
5.3% = US$95m ÷ US$1.8b (Based on the trailing twelve months to March 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 $0.05.
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.
Weingarten Realty Investors' Earnings Growth And 5.3% ROE
At first glance, Weingarten Realty Investors' 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%. Having said that, Weingarten Realty Investors' five year net income decline rate was 3.9%. Bear in mind, the company does have a slightly low ROE. Hence, this goes some way in explaining the shrinking earnings.
So, as a next step, we compared Weingarten Realty Investors' performance against the industry and were disappointed to discover that while the company has been shrinking its earnings, the industry has been growing its earnings at a rate of 10.0% in the same period.
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). This then helps them determine if the stock is placed for a bright or bleak future. Is WRI fairly valued? This infographic on the company's intrinsic value has everything you need to know.
Is Weingarten Realty Investors Making Efficient Use Of Its Profits?
Weingarten Realty Investors seems to be paying out most of its income as dividends judging by its three-year median payout ratio of 66% (meaning, the company retains only 34% of profits). However, this is typical for REITs as they are often required by law to distribute most of their earnings. So this probably explains the company's shrinking earnings.
Additionally, Weingarten Realty Investors 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 65%.
In total, we would have a hard think before deciding on any investment action concerning Weingarten Realty Investors. As a result of its low ROE and lack of much reinvestment into the business, the company has seen a disappointing earnings growth rate. In addition, on studying the latest analyst forecasts, we found that the company's earnings are expected to continue to shrink. 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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