Yahoo Finance InvenTrust Properties Corp.'s (NYSE:IVT) On An Uptrend But Financial Prospects Look Pretty Weak: Is The Stock Overpriced?
InvenTrust Properties (NYSE:IVT) has had a great run on the share market with its stock up by a significant 5.4% over the last month. However, we decided to pay close attention to its weak financials as we are doubtful that the current momentum will keep up, given the scenario. Particularly, we will be paying attention to InvenTrust Properties' ROE today.
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 InvenTrust Properties
How To Calculate Return On Equity?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for InvenTrust Properties is:
2.8% = US$45m ÷ US$1.6b (Based on the trailing twelve months to June 2022).
The 'return' is the income the business earned over the last year. That means that for every $1 worth of shareholders' equity, the company generated $0.03 in profit.
What Has ROE Got To Do With Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.
InvenTrust Properties' Earnings Growth And 2.8% ROE
As you can see, InvenTrust Properties' ROE looks pretty weak. Even compared to the average industry ROE of 6.5%, the company's ROE is quite dismal. For this reason, InvenTrust Properties' five year net income decline of 40% is not surprising given its lower ROE. We reckon that there could also be other factors at play here. For example, the business has allocated capital poorly, or that the company has a very high payout ratio.
However, when we compared InvenTrust Properties' growth with the industry we found that while the company's earnings have been shrinking, the industry has seen an earnings growth of 11% in the same period. This is quite worrisome.
Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is InvenTrust Properties fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is InvenTrust Properties Efficiently Re-investing Its Profits?
InvenTrust Properties seems to be paying out most of its income as dividends judging by its three-year median payout ratio of 55% (meaning, the company retains only 45% of profits). However, this is typical for REITs as they are often required by law to distribute most of their earnings. Accordingly, this likely explains why its earnings have been shrinking.
Additionally, InvenTrust Properties has paid dividends over a period of eight years, which means that the company's management is rather focused on keeping up its dividend payments, regardless of the shrinking earnings.
Conclusion
In total, we would have a hard think before deciding on any investment action concerning InvenTrust Properties. The company has seen a lack of earnings growth as a result of retaining very little profits and whatever little it does retain, is being reinvested at a very low rate of return. Additionally, the latest industry analyst forecasts show that analysts expect the company's earnings to continue to shrink in the future. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.
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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.
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