Is the recent stock market performance of Embassy Office Parks REIT (NSE:EMBASSY) influenced in any way by its financial statements?

Shares of Embassy Office Parks REIT (NSE:EMBASSY) rose 1.5% over the past week. We wonder if and what role company finances play in this price change, as a company’s long-term fundamentals usually dictate market outcomes. In this article, we decided to focus on the ROE of Embassy Office Parks REIT.

ROE or return on equity is a useful tool for evaluating how effectively a company can generate returns on the investment it has received from its shareholders. In short, ROE shows the profit that each dollar generates in relation to the investments of its shareholders.

Check out our latest analysis for Embassy Office Parks REIT

How do you 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:

3.4% = ₹8.6 billion ÷ ₹256 billion (based on the last twelve months to June 2022).

The “return” is the annual profit. One way to conceptualize this is that for every ₹1 of share capital it has, the company has made a profit of ₹0.03.

What does ROE have to do with earnings growth?

So far we have learned that ROE is a measure of a company’s profitability. Depending on how much of those earnings the company reinvests or “keeps”, and how efficiently it does so, we are then able to gauge a company’s earnings growth potential. Generally speaking, all things being equal, companies with high return on equity and earnings retention have a higher growth rate than companies that do not share these attributes.

A side-by-side comparison of Embassy Office Parks REIT earnings growth and ROE of 3.4%

As you can see, the ROE of Embassy Office Parks REIT seems quite weak. Even compared to the industry average of 6.1%, the ROE figure is quite disappointing. However, we are pleasantly surprised to see that Embassy Office Parks REIT has grown its net income at a significant rate of 27% over the past five years. We believe there could be other aspects that positively influence the company’s earnings growth. For example, it is possible that the management of the company has made good strategic decisions or that the company has a low payout ratio.

Then, comparing with the growth in net income of the sector, we found that the growth of Embassy Office Parks REIT is quite high compared to the average growth of the sector of 7.8% during the same period, which is great to see.

NSEI: EMBASSY Past Earnings Growth August 9, 2022

Earnings growth is an important factor in stock valuation. It is important for an investor to know whether the market has priced in the expected growth (or decline) in the company’s earnings. This will help them determine if the future of the title looks bright or ominous. Has the market priced in EMBASSY’s future prospects? You can find out in our latest infographic research report on intrinsic value.

Does Embassy Office Parks REIT use profits efficiently?

Embassy Office Parks REIT appears to be paying out most of its income in the form of dividends judging by its three-year median payout ratio of 93%, which means the company only keeps 7.2% of its income. However, this is typical for REITs as they are often required by law to distribute most of their profits. Despite this, the company was able to increase its profits significantly, as we saw above.

Additionally, Embassy Office Parks REIT paid dividends over a three-year period. This shows that the company is committed to sharing profits with its shareholders. Our latest analyst data shows that the company’s future payout ratio over the next three years is expected to be around 96%. Either way, Embassy Office Parks REIT’s future ROE is expected to reach 6.1% despite little change expected in its payout ratio.

Conclusion

All in all, it would seem that Embassy Office Parks REIT has positive aspects for its business. Namely, its strong earnings growth. We believe, however, that the earnings growth figure could have been even higher had the company reinvested more of its earnings and paid fewer dividends. That said, the latest forecasts from industry analysts show that the company’s earnings growth is expected to slow. For more on the company’s future earnings growth forecast, check out this free analyst forecast report for the company to learn more.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.