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Do Fundamentals Have Any Role To Play In Driving Triple Point Social Housing REIT plc's (LON:SOHO) Stock Up Recently?

Triple Point Social Housing REIT's (LON:SOHO) stock is up by 5.5% over the past three months. As most would know, long-term fundamentals have a strong correlation with market price movements, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. Specifically, we decided to study Triple Point Social Housing REIT's ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

Check out our latest analysis for Triple Point Social Housing REIT

How Do You 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 Triple Point Social Housing REIT is:

6.5% = UK£28m ÷ UK£436m (Based on the trailing twelve months to December 2021).

The 'return' is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each £1 of shareholders' capital it has, the company made £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. 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. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

A Side By Side comparison of Triple Point Social Housing REIT's Earnings Growth And 6.5% ROE

When you first look at it, Triple Point Social Housing REIT's ROE doesn't look that attractive. Next, when compared to the average industry ROE of 12%, the company's ROE leaves us feeling even less enthusiastic. However, the moderate 14% net income growth seen by Triple Point Social Housing REIT over the past five years is definitely a positive. So, there might be other aspects that are positively influencing the company's earnings growth. Such as - high earnings retention or an efficient management in place.

Next, on comparing with the industry net income growth, we found that Triple Point Social Housing REIT's growth is quite high when compared to the industry average growth of 2.7% in the same period, which is great to see.

past-earnings-growth
past-earnings-growth

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. What is SOHO worth today? The intrinsic value infographic in our free research report helps visualize whether SOHO is currently mispriced by the market.

Is Triple Point Social Housing REIT Using Its Retained Earnings Effectively?

Triple Point Social Housing REIT seems to be paying out most of its income as dividends judging by its three-year median payout ratio of 92%, meaning the company retains only 8.4% 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.

Additionally, Triple Point Social Housing REIT has paid dividends over a period of four years which means that the company is pretty serious about sharing its profits with shareholders. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 79% of its profits over the next three years. As a result, Triple Point Social Housing REIT's ROE is not expected to change by much either, which we inferred from the analyst estimate of 6.3% for future ROE.

Summary

Overall, we feel that Triple Point Social Housing REIT 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. The latest industry analyst forecasts show that the company is expected to maintain 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.

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.