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Digital Realty Trust, Inc. (NYSE:DLR) Is Going Strong But Fundamentals Appear To Be Mixed : Is There A Clear Direction For The Stock?

Digital Realty Trust's's (NYSE:DLR) stock is up by a considerable 14% over the past three months. However, we wonder if the company's inconsistent financials would have any adverse impact on the current share price momentum. Particularly, we will be paying attention to Digital Realty Trust's ROE today.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

View our latest analysis for Digital Realty Trust

How To Calculate Return On Equity?

The formula for ROE is:

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

So, based on the above formula, the ROE for Digital Realty Trust is:

5.6% = US$599m ÷ US$11b (Based on the trailing twelve months to December 2019).

The 'return' is the income the business earned over the last year. Another way to think of that is that for every $1 worth of equity, the company was able to earn $0.06 in profit.

Why Is ROE Important For Earnings Growth?

Thus far, we have learnt that ROE measures how efficiently a company is generating its profits. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.

Digital Realty Trust's Earnings Growth And 5.6% ROE

When you first look at it, Digital Realty Trust's ROE doesn't look that attractive. Yet, a closer study shows that the company's ROE is similar to the industry average of 5.8%. Having said that, Digital Realty Trust has shown a modest net income growth of 9.7% over the past five years. 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.

As a next step, we compared Digital Realty Trust's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 15% in the same period.

NYSE:DLR Past Earnings Growth April 17th 2020
NYSE:DLR Past Earnings Growth April 17th 2020

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. What is DLR worth today? The intrinsic value infographic in our free research report helps visualize whether DLR is currently mispriced by the market.

Is Digital Realty Trust Making Efficient Use Of Its Profits?

Digital Realty Trust seems to be paying out most of its income as dividends judging by its three-year median payout ratio of 71%, meaning the company retains only 29% of its income. However, this is typical for REITs as they are often required by law to distribute most of their earnings. In spite of this, the company was able to grow its earnings by a fair bit, as we saw above.

Besides, Digital Realty Trust has been paying dividends for at least ten years or more. 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's future payout ratio is expected to drop to 0.3% over the next three years. Regardless, the ROE is not expected to change much for the company despite the lower expected payout ratio.

Conclusion

Overall, we have mixed feelings about Digital Realty Trust. Although the company has shown a fair bit of growth in earnings, the reinvestment rate is low. Meaning, the earnings growth number could have been significantly higher had the company been retaining more of its profits and reinvesting that at a higher rate of return. We also studied the latest analyst forecasts and found that the company's earnings growth is expected be similar to its current growth rate. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.