New Zealand markets open in 2 minutes
  • NZX 50

    10,997.92
    +184.00 (+1.70%)
     
  • NZD/USD

    0.6304
    -0.0015 (-0.23%)
     
  • ALL ORDS

    6,893.60
    +131.20 (+1.94%)
     
  • OIL

    109.81
    +0.24 (+0.22%)
     
  • GOLD

    1,824.00
    -0.80 (-0.04%)
     

Alexandria Real Estate Equities, Inc.'s (NYSE:ARE) Stock Has Shown Weakness Lately But Financial Prospects Look Decent: Is The Market Wrong?

·4-min read

It is hard to get excited after looking at Alexandria Real Estate Equities' (NYSE:ARE) recent performance, when its stock has declined 16% over the past month. However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. In this article, we decided to focus on Alexandria Real Estate Equities' ROE.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

View our latest analysis for Alexandria Real Estate Equities

How Do You Calculate Return On Equity?

Return on equity can be calculated by using the formula:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Alexandria Real Estate Equities is:

2.5% = US$511m ÷ US$20b (Based on the trailing twelve months to March 2022).

The 'return' is the income the business earned over the last year. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.03.

What Is The Relationship Between ROE And 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

Alexandria Real Estate Equities' Earnings Growth And 2.5% ROE

It is hard to argue that Alexandria Real Estate Equities' ROE is much good in and of itself. Not just that, even compared to the industry average of 6.5%, the company's ROE is entirely unremarkable. In spite of this, Alexandria Real Estate Equities was able to grow its net income considerably, at a rate of 36% in the last five years. Therefore, there could be other reasons behind this growth. Such as - high earnings retention or an efficient management in place.

We then compared Alexandria Real Estate Equities' net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 11% in the same period.

past-earnings-growth
past-earnings-growth

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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 ARE worth today? The intrinsic value infographic in our free research report helps visualize whether ARE is currently mispriced by the market.

Is Alexandria Real Estate Equities Using Its Retained Earnings Effectively?

Alexandria Real Estate Equities has a very high three-year median payout ratio of 51%. This means that it has only 49% 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. Regardless, this hasn't hampered its ability to grow as we saw earlier.

Moreover, Alexandria Real Estate Equities is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 53%. As a result, Alexandria Real Estate Equities' ROE is not expected to change by much either, which we inferred from the analyst estimate of 2.8% for future ROE.

Summary

On the whole, we do feel that Alexandria Real Estate Equities has some positive attributes. While no doubt its earnings growth is pretty substantial, we do feel that the reinvestment rate is pretty low, meaning, the earnings growth number could have been significantly higher had the company been retaining more of its profits. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an 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 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.

Our goal is to create a safe and engaging place for users to connect over interests and passions. In order to improve our community experience, we are temporarily suspending article commenting