It’s hard to get excited after looking at the recent performance of Embassy Office Parks REIT (NSE: EMBASSY), as its stock has fallen 5.5% in the past month. It seems that the market has completely ignored the positive aspects of the company’s fundamentals and decided to weigh more heavily on the negative aspects. Stock prices are usually determined by a company’s long-term financial performance, which is why we have decided to pay more attention to the company’s financial performance. Specifically, we have decided to study the ROE of Embassy Office Parks REIT in this article.
Return on equity or ROE is a test of how effectively a company increases its value and manages investor money. Simply put, it is used to assess a company’s profitability against its equity.
Check out our latest review for Embassy Office Parks REIT
How to calculate return on equity?
ROE can be calculated using the formula:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE for Embassy Office Parks REIT is:
2.6% = ₹ 7.0b ÷ ₹ 268b (based on the last twelve months up to June 2021).
The “return” is the annual profit. This means that for every 1 of equity, the company generated 0.03 of profit.
What is the relationship between ROE and profit growth?
We have already established that ROE is an effective indicator of profit generation for a company’s future profits. Based on how much of those profits the company reinvests or “withholds” and its efficiency, we are then able to assess a company’s profit growth potential. Generally speaking, all other things being equal, companies with high return on equity and high profit retention have a higher growth rate than companies that do not share these attributes.
A side-by-side comparison of Embassy Office Parks profit growth and 2.6% ROE
It is quite clear that the ROE of Embassy Office Parks REIT is rather low. Even compared to the industry average of 5.6%, the ROE figure is quite disappointing. However, we are pleasantly surprised to see that Embassy Office Parks REIT has grown its bottom line at a significant rate of 33% over the past five years. Therefore, there could be other reasons behind this growth. Such as – high profit retention or effective management in place.
Then, comparing with the growth in net income of the industry, we found that the growth of Embassy Office Parks REIT is quite high compared to the industry average growth of 6.7% over the same period, which is great to see.
Profit growth is an important metric to consider when valuing a stock. What investors next need to determine is whether the expected earnings growth, or lack thereof, is already built into the share price. This then helps them determine whether the stock is set for a bright or dark future. What is AMBASSY worth today? The intrinsic value infographic in our free research report helps to visualize whether EMBASSY is currently poorly valued by the market.
Does Embassy Office Parks REIT Effectively Reinvest Profits?
The very high three-year median payout rate of 109% for Embassy Office Parks REIT suggests the company pays its shareholders more than it earns. Despite this, the company was able to increase its profits significantly, as we saw above. That said, the high payout ratio is definitely risky and one to watch out for. Our risk dashboard should contain the 3 risks we have identified for Embassy Office Parks REIT.
In addition to seeing earnings growth, Embassy Office Parks REIT only recently started paying dividends. It is quite possible that the company is trying to impress its shareholders. Based on the latest analyst estimates, we found that the company’s future payout ratio over the next three years is expected to hold steady at 102%. Still, forecasts suggest that Embassy Office Parks REIT’s future ROE will increase to 5.7%, although the company’s payout ratio isn’t expected to change much.
Overall, we are a little ambivalent about the performance of Embassy Office Parks REIT. While its profit growth is undoubtedly quite substantial, its ROE and profit retention are quite low. So while the company has managed to increase its profits despite this, we are not convinced that this growth can be sustained, especially in times of turmoil. That said, the company’s earnings growth is expected to slow, as current analyst estimates predict. To learn more about the latest analyst forecast for the business, check out this visualization of the analyst forecast for the business.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.
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