Weingarten Realty Investors (NYSE:WRI) has had a great run on the share market with its stock up by a significant 6.2% over the last week. 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 Weingarten Realty Investors' 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.
How Do You 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:
14% = US$252m ÷ US$1.9b (Based on the trailing twelve months to June 2020).
The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each $1 of shareholders' capital it has, the company made $0.14 in profit.
Why Is ROE Important For Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.
A Side By Side comparison of Weingarten Realty Investors' Earnings Growth And 14% ROE
At first glance, Weingarten Realty Investors seems to have a decent ROE. Further, the company's ROE compares quite favorably to the industry average of 5.0%. Probably as a result of this, Weingarten Realty Investors was able to see a decent growth of 8.8% over the last five years.
Next, on comparing with the industry net income growth, we found that Weingarten Realty Investors' reported growth was lower than the industry growth of 14% in the same period, which is not something we like 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). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. What is WRI worth today? The intrinsic value infographic in our free research report helps visualize whether WRI is currently mispriced by the market.
Is Weingarten Realty Investors Efficiently Re-investing Its Profits?
Weingarten Realty Investors has a high three-year median payout ratio of 66%. This means that it has only 34% 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.
Additionally, Weingarten Realty Investors 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. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 62%. Regardless, Weingarten Realty Investors' ROE is speculated to decline to 4.5% despite there being no anticipated change in its payout ratio.
Overall, we feel that Weingarten Realty Investors certainly does have some positive factors to consider. Its earnings have grown respectably as we saw earlier, which was likely due to the company reinvesting its earnings at a pretty high rate of return. However, given the high ROE, we do think that the company is reinvesting a small portion of its profits. This could likely be preventing the company from growing to its full extent. That being so, according to the latest industry analyst forecasts, the company's earnings are expected to shrink in the future. 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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