UK markets open in 2 hours 27 minutes
  • NIKKEI 225

    27,911.64
    +91.24 (+0.33%)
     
  • HANG SENG

    19,310.58
    -207.71 (-1.06%)
     
  • CRUDE OIL

    77.35
    +0.42 (+0.55%)
     
  • GOLD FUTURES

    1,784.90
    +3.60 (+0.20%)
     
  • DOW

    33,947.10
    -482.78 (-1.40%)
     
  • BTC-GBP

    13,959.73
    -334.08 (-2.34%)
     
  • CMC Crypto 200

    401.77
    -9.44 (-2.30%)
     
  • ^IXIC

    11,239.94
    -221.56 (-1.93%)
     
  • ^FTAS

    4,143.21
    +4.40 (+0.11%)
     

Declining Stock and Decent Financials: Is The Market Wrong About Innovative Industrial Properties, Inc. (NYSE:IIPR)?

Innovative Industrial Properties (NYSE:IIPR) has had a rough three months with its share price down 14%. 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 Innovative Industrial Properties' ROE.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View our latest analysis for Innovative Industrial Properties

How To 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 Innovative Industrial Properties is:

6.8% = US$134m ÷ US$2.0b (Based on the trailing twelve months to June 2022).

The 'return' is the yearly profit. That means that for every $1 worth of shareholders' equity, the company generated $0.07 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. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.

A Side By Side comparison of Innovative Industrial Properties' Earnings Growth And 6.8% ROE

On the face of it, Innovative Industrial Properties' ROE is not much to talk about. Yet, a closer study shows that the company's ROE is similar to the industry average of 6.6%. Particularly, the exceptional 67% net income growth seen by Innovative Industrial Properties over the past five years is pretty remarkable. Given the slightly low ROE, it is likely that there could be some other aspects that are driving this growth. Such as - high earnings retention or an efficient management in place.

Next, on comparing with the industry net income growth, we found that Innovative Industrial Properties' growth is quite high when compared to the industry average growth of 11% in the same period, which is great to see.

past-earnings-growth
past-earnings-growth

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Innovative Industrial Properties fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Innovative Industrial Properties Making Efficient Use Of Its Profits?

Innovative Industrial Properties has a very high three-year median payout ratio of 84%. This means that it has only 16% 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. Despite this, the company's earnings have grown significantly as we saw above.

Besides, Innovative Industrial Properties has been paying dividends over a period of five years. This shows that the company is committed to sharing profits with its shareholders. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 91% of its profits over the next three years.

Conclusion

Overall, we feel that Innovative Industrial Properties certainly does have some positive factors to consider. That is, quite an impressive growth in earnings. However, the low profit retention means that the company's earnings growth could have been higher, had it been reinvesting a higher portion 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. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

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.

Join A Paid User Research Session
You’ll receive a US$30 Amazon Gift card for 1 hour of your time while helping us build better investing tools for the individual investors like yourself. Sign up here