Yahoo Finance Tritax Big Box REIT plc's (LON:BBOX) Stock Is Going Strong: Have Financials A Role To Play?
Tritax Big Box REIT (LON:BBOX) has had a great run on the share market with its stock up by a significant 15% over the last month. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. Particularly, we will be paying attention to Tritax Big Box REIT's ROE today.
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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
View our latest analysis for Tritax Big Box REIT
How To Calculate Return On Equity?
The formula for return on equity is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Tritax Big Box REIT is:
5.5% = UK£141m ÷ UK£2.6b (Based on the trailing twelve months to December 2019).
The 'return' is the profit over the last twelve months. That means that for every £1 worth of shareholders' equity, the company generated £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. 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. 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.
Tritax Big Box REIT's Earnings Growth And 5.5% ROE
At first glance, Tritax Big Box REIT's ROE doesn't look very promising. However, given that the company's ROE is similar to the average industry ROE of 5.5%, we may spare it some thought. Moreover, we are quite pleased to see that Tritax Big Box REIT's net income grew significantly at a rate of 21% over the last 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.
Next, on comparing with the industry net income growth, we found that Tritax Big Box REIT's growth is quite high when compared to the industry average growth of 4.6% in the same period, which is great to see.
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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. What is BBOX worth today? The intrinsic value infographic in our free research report helps visualize whether BBOX is currently mispriced by the market.
Is Tritax Big Box REIT Using Its Retained Earnings Effectively?
Tritax Big Box REIT seems to be paying out most of its income as dividends judging by its three-year median payout ratio of 89%, meaning the company retains only 11% of its income. However, this is typical for REITs as they are often required by law to distribute most of their earnings. Regardless, this hasn't hampered its ability to grow as we saw earlier.
Besides, Tritax Big Box REIT has been paying dividends over a period of six 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 95% of its profits over the next three years.
Conclusion
On the whole, we do feel that Tritax Big Box REIT has some positive attributes. While no doubt its earnings growth is pretty substantial, we do feel that the reinvestment rate is pretty low, meaning, the earnings growth number could have been significantly higher had the company been retaining more of its profits. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. 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. 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. Thank you for reading.
