Yahoo Finance Could The Market Be Wrong About Equity Residential (NYSE:EQR) Given Its Attractive Financial Prospects?
With its stock down 9.8% over the past month, it is easy to disregard Equity Residential (NYSE:EQR). But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. In this article, we decided to focus on Equity Residential's 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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.
See our latest analysis for Equity Residential
How To Calculate Return On Equity?
ROE 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 Equity Residential is:
11% = US$1.3b ÷ US$12b (Based on the trailing twelve months to June 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 $0.11.
Why Is ROE Important For 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.
Equity Residential's Earnings Growth And 11% ROE
To start with, Equity Residential's ROE looks acceptable. Especially when compared to the industry average of 6.6% the company's ROE looks pretty impressive. This probably laid the ground for Equity Residential's moderate 13% net income growth seen over the past five years.
We then compared Equity Residential's 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.
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. What is EQR worth today? The intrinsic value infographic in our free research report helps visualize whether EQR is currently mispriced by the market.
Is Equity Residential Using Its Retained Earnings Effectively?
Equity Residential seems to be paying out most of its income as dividends judging by its three-year median payout ratio of 72%, meaning the company retains only 28% of its income. However, this is typical for REITs as they are often required by law to distribute most of their earnings. Despite this, the company's earnings grew moderately as we saw above.
Moreover, Equity Residential 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 67%. Regardless, Equity Residential's ROE is speculated to decline to 6.2% despite there being no anticipated change in its payout ratio.
Conclusion
Overall, we are quite pleased with Equity Residential's performance. We are particularly impressed by the considerable earnings growth posted by the company, which was likely backed by its high ROE. While the company is paying out most of its earnings as dividends, it has been able to grow its earnings in spite of it, so that's probably a good sign. 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.
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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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