With an ROE of 24.30%, Weingarten Realty Investors (NYSE:WRI) outpaced its own industry which delivered a less exciting 7.57% over the past year. While the impressive ratio tells us that WRI has made significant profits from little equity capital, ROE doesn’t tell us if WRI has borrowed debt to make this happen. In this article, we’ll closely examine some factors like financial leverage to evaluate the sustainability of WRI’s ROE. Check out our latest analysis for Weingarten Realty Investors
Breaking down ROE — the mother of all ratios
Return on Equity (ROE) is a measure of Weingarten Realty Investors’s profit relative to its shareholders’ equity. For example, if the company invests $1 in the form of equity, it will generate $0.24 in earnings from this. In most cases, a higher ROE is preferred; however, there are many other factors we must consider prior to making any investment decisions.
Return on Equity = Net Profit ÷ Shareholders Equity
Returns are usually compared to costs to measure the efficiency of capital. Weingarten Realty Investors’s cost of equity is 8.49%. Since Weingarten Realty Investors’s return covers its cost in excess of 15.81%, its use of equity capital is efficient and likely to be sustainable. Simply put, Weingarten Realty Investors pays less for its capital than what it generates in return. ROE can be split up into three useful ratios: net profit margin, asset turnover, and financial leverage. This is called the Dupont Formula:
ROE = profit margin × asset turnover × financial leverage
ROE = (annual net profit ÷ sales) × (sales ÷ assets) × (assets ÷ shareholders’ equity)
ROE = annual net profit ÷ shareholders’ equity
Essentially, profit margin shows how much money the company makes after paying for all its expenses. Asset turnover reveals how much revenue can be generated from Weingarten Realty Investors’s asset base. And finally, financial leverage is simply how much of assets are funded by equity, which exhibits how sustainable the company’s capital structure is. Since ROE can be artificially increased through excessive borrowing, we should check Weingarten Realty Investors’s historic debt-to-equity ratio. The debt-to-equity ratio currently stands at a balanced 101.17%, meaning the above-average ROE is due to its capacity to produce profit growth without a huge debt burden.
ROE is one of many ratios which meaningfully dissects financial statements, which illustrates the quality of a company. Weingarten Realty Investors’s ROE is impressive relative to the industry average and also covers its cost of equity. ROE is not likely to be inflated by excessive debt funding, giving shareholders more conviction in the sustainability of high returns. ROE is a helpful signal, but it is definitely not sufficient on its own to make an investment decision.
For Weingarten Realty Investors, I’ve put together three important aspects you should further examine:
- Financial Health: Does it have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
- Valuation: What is Weingarten Realty Investors worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether Weingarten Realty Investors is currently mispriced by the market.
- Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of Weingarten Realty Investors? Explore our interactive list of stocks with large growth potential to get an idea of what else is out there you may be missing!
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.