Could the market be wrong about Dexus Convenience Retail REIT (ASX: DXC) given its attractive financial prospects?
It’s hard to get excited after looking at the recent performance of Dexus Convenience Retail REIT ASX:DXC, when its stock is down 14% over the past three months. However, stock prices are usually driven by the company’s long-term financial performance, which in this case looks very promising. In this article, we’ve decided to focus on the return on equity for Dexus Convenience Retail REIT.
Return on Equity or Return on Equity is a useful tool for evaluating how effectively a company is generating returns on the investment it has received from its shareholders. In other words, it reveals the company’s success in converting shareholder investments into profits.
Check out our latest analysis for the Dexus Convenience Retail REIT
How is return on equity calculated?
Return on equity can be calculated using the formula:
Return on Equity = Net Profit (from Continuing Operations) ÷ Shareholders’ Equity
So, based on the above formula, the return on equity for the Dexus Convenience Retail REIT is:
17% = A$93 million ÷ A$532 million (based on the subsequent twelve months to December 2021).
“Return” is the amount earned after tax over the past 12 months. This means that for every Australian dollar of shareholder equity, the company generated a profit of A$0.17.
Why is return on equity important to earnings growth?
We have already established that ROE acts as an effective profit generation measure for a company’s future earnings. Depending on how much of these earnings the company reinvests or “keeps”, and how effective this is, we can then assess the company’s earnings growth potential. In general, other things being equal, companies with high return on equity and retained earnings have a higher growth rate than companies that do not share these traits.
A side-by-side comparison to Dexus Convenience Retail REIT earnings growth and 17% ROE
First of all, it appears that Dexus Convenience REITs have a respectable return on equity. Even when compared to the industry average of 15%, the company’s ROE looks quite decent. Thus, this likely paved the way for the astounding 38% net income growth seen over the past five years by Dexus Convenience Retail REIT. We believe that there may also be other aspects that positively impact the company’s earnings growth. Such as – keeping high profits or having effective management.
Then, when comparing industry net income growth, we find that Dexus Convenience Retail REIT growth is very high compared to the industry average growth of 11% in the same period, which is great to see.
Earnings growth is a big factor in stock valuation. It is important for an investor to know whether the market has priced the growth (or decline) of a company’s expected earnings. This then helps them decide whether to position the stock for a bright or bleak future. If you’re wondering how Dexus Convenience Retail REIT evaluates, check out this measure of price-to-earnings ratio, compared to its industry.
Are Dexus REITs making efficient use of their dividends?
Dexus Convenience Retail REIT has an extremely high three-year average return of 91%. This means that only 8.9% of her income is left to reinvest in her business. However, it is not unusual to see a REIT with such a high payout ratio primarily due to legal requirements. Despite this, the company managed to significantly increase its profits, as we saw above.
In addition, Dexus Convenience Retail REIT has paid out dividends over a five-year period which means the company is very serious about sharing its dividend with shareholders. Based on the latest analyst estimates, we found that the company’s future payments ratio over the next three years is expected to remain steady at 100%. However, the future return on equity for Dexus Convenience Retail REIT is expected to decline to 5.8% despite no significant change in the company’s earnings ratio expected.
Overall, we feel that Dexus Convenience Retail REIT has performed very well. We were particularly impressed with the company’s significant earnings growth, which is likely supported by its high return on equity. While the company pays most of its dividends as dividends, it has been able to increase its dividend though, so that’s probably a good sign. Be that as it may, according to the latest forecasts of industry analysts, the company’s profits are expected to shrink in the future. Are these analysts’ forecasts based on broad industry expectations or company fundamentals? Click here to go to our analyst forecast page for the company.
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This article by Simply Wall St is general in nature. We provide comments based solely on historical data and analyst expectations 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, nor does it take into account your objectives or financial situation. We aim to provide you with focused, long-term analysis driven by essential data. Note that our analysis may not include the company’s most recent price-sensitive ads or quality materials. Wall Street simply has no position in any of the stocks mentioned.
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