To The Moon

$ASCENDAS REAL ESTATE INV TRUST(A17U.SI)$

It is hard to get excited after looking at Ascendas Real Estate Investment Trust's (SGX:A17U) recent performance, when its stock has declined 2.7% over the past week. However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. Particularly, we will be paying attention to A17U's ROE today.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Put another way, it reveals the company's success at turning shareholder investments into profits.

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 Ascendas Real Estate Investment Trust is:

9.3% = S$957m ÷ S$10b (Based on the trailing twelve months to December 2021).

The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every SGD1 worth of equity, the company was able to earn SGD0.09 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 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.

Ascendas Real Estate Investment Trust's Earnings Growth And 9.3% ROE

At first glance, Ascendas Real Estate Investment Trust's ROE doesn't look very promising. However, the fact that the company's ROE is higher than the average industry ROE of 6.7%, is definitely interesting. Consequently, this likely laid the ground for the decent growth of 11% seen over the past five years by Ascendas Real Estate Investment Trust. Bear in mind, the company does have a moderately low ROE. It is just that the industry ROE is lower. So there might well be other reasons for the earnings to grow. For example, it is possible that the broader industry is going through a high growth phase, or that the company has a low payout ratio.

When you consider the fact that the industry earnings have shrunk at a rate of 2.3% in the same period, the company's net income growth is pretty remarkable.

SGX:A17U Past Earnings Growth April 13th 2022

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.

Is Ascendas Real Estate Investment Trust Efficiently Re-investing Its Profits?

Ascendas Real Estate Investment Trust has a high three-year median payout ratio of 78%. This means that it has only 22% 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. In spite of this, the company was able to grow its earnings by a fair bit, as we saw above.

Moreover, Ascendas Real Estate Investment Trust 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. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to rise to 97% over the next three years. Therefore, the expected rise in the payout ratio explains why the company's ROE is expected to decline to 6.8% over the same period.