First Capital Real Estate Investment Trust (TSE: FCR.UN) shares rose 3.8% in the past month. As most know, long-term fundamentals have a strong correlation with market price movements, so we decided to look at the company’s key financial metrics today to see if they have a role to play. in the recent price movement. Specifically, we have decided to study the ROE of First Capital Real Estate Investment Trust in this article.
Return on equity or ROE is a key metric used to assess the efficiency with which the management of a business is using business capital. Simply put, it is used to assess a company’s profitability against its equity.
Check out our latest review for First Capital Real Estate Investment Trust
How do you calculate return on equity?
ROE can be calculated using the formula:
Return on equity = Net income (from continuing operations) ÷ Equity
Thus, based on the above formula, the ROE of First Capital Real Estate Investment Trust is:
10% = C $ 484 million ÷ C $ 4.7 billion (based on the last twelve months to September 2021).
The “return” is the amount earned after tax over the past twelve months. This therefore means that for every CA $ 1 invested by its shareholder, the company generates a profit of CA $ 0.10.
What is the relationship between ROE and profit growth?
So far, we’ve learned that ROE is a measure of a company’s profitability. 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. Assuming everything else remains the same, the higher the ROE and profit retention, the higher the growth rate of a business compared to businesses that don’t necessarily have these characteristics.
First Capital Real Estate Investment Trust profit growth and 10% ROE
At first glance, First Capital Real Estate Investment Trust appears to have a decent ROE. Even compared to the industry average of 10%, the company’s ROE looks pretty decent. However, while First Capital Real Estate Investment Trust has a pretty respectable ROE, its five-year rate of decline in net income was 19%. Based on this, we believe that there might be other reasons that have not been discussed so far in this article that may be hampering the growth of the business. For example, the company pays out a large portion of its profits as dividends or faces competitive pressures.
So, in the next step, we compared the performance of First Capital Real Estate Investment Trust against the industry and were disappointed to find that as the company reduced its profits, the industry increased its profits to a low. 13% rate in the same end point.
The basis for attaching value to a business is, to a large extent, related to the growth of its profits. It is important for an investor to know whether the market has factored in the expected growth (or decline) in company earnings. By doing this, they will have an idea if the stock is heading for clear blue waters or if swampy waters are waiting for them. Has the market taken into account the future prospects of FCR.UN? You can find out in our latest Intrinsic Value infographic research report.
Does First Capital Real Estate Investment Trust Effectively Reinvest Profits?
First Capital Real Estate Investment Trust appears to pay most of its income as dividends judging by its three-year median payout ratio of 70% (meaning the company only keeps 30% of the profits). However, this is typical for REITs as they are often required by law to distribute most of their income. This probably explains the decline in the company’s profits.
Additionally, First Capital Real Estate Investment Trust has been paying dividends for at least ten years or more, suggesting that management must have perceived that shareholders prefer dividends over earnings growth. Estimates from existing analysts suggest the company’s future payout ratio is expected to drop to 51% over the next three years.
Overall, we think First Capital Real Estate Investment Trust certainly has some positive factors to consider. However, although the company has a high ROE, its profit growth figure is quite disappointing. This can be attributed to the fact that it only reinvests a small portion of its profits and pays the rest as dividends. So far, we’ve only done a brief review of the company’s growth data. So maybe it’s worth checking this out free detailed graphic past earnings from First Capital Real Estate Investment Trust, as well as income and cash flow to gain a deeper insight into the performance of the business.
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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 any stock 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 material. Simply Wall St has no position in any of the stocks mentioned.