Should Weakness in Charter Hall Long WALE REIT’s (ASX:CLW) Stock Be Seen As A Sign That Market Will Correct The Share Price Given Decent Financials?

With its stock down 21% over the past three months, it is easy to disregard Charter Hall Long WALE REIT (ASX:CLW). However, the company’s fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. Specifically, we decided to study Charter Hall Long WALE 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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for Charter Hall Long WALE 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 Charter Hall Long WALE REIT is:

5.7% = AU$124m ÷ AU$2.2b (Based on the trailing twelve months to December 2019).

The ‘return’ is the amount earned after tax over the last twelve months. So, this means that for every A$1 of its shareholder’s investments, the company generates a profit of A$0.06.

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company’s future earnings. 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.

Charter Hall Long WALE REIT’s Earnings Growth And 5.7% ROE

When you first look at it, Charter Hall Long WALE REIT’s ROE doesn’t look that attractive. Next, when compared to the average industry ROE of 8.0%, the company’s ROE leaves us feeling even less enthusiastic. In spite of this, Charter Hall Long WALE REIT was able to grow its net income considerably, at a rate of 45% in the last five years. We reckon that there could be other factors at play here. For example, it is possible that the company’s management has made some good strategic decisions, or that the company has a low payout ratio.

Next, on comparing with the industry net income growth, we found that Charter Hall Long WALE REIT’s growth is quite high when compared to the industry average growth of 7.9% in the same period, which is great to see.

ASX:CLW Past Earnings Growth April 29th 2020

More

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. This then helps them determine if the stock is placed for a bright or bleak future. Has the market priced in the future outlook for CLW? You can find out in our latest intrinsic value infographic research report.

Is Charter Hall Long WALE REIT Efficiently Re-investing Its Profits?

Charter Hall Long WALE REIT has a very high three-year median payout ratio of 84%. This means that it has only 16% 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 significantly, as we saw above.

Story continues

Besides, Charter Hall Long WALE REIT has been paying dividends over a period of three 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 97% of its profits over the next three years. As a result, Charter Hall Long WALE REIT’s ROE is not expected to change by much either, which we inferred from the analyst estimate of 6.4% for future ROE.

Summary

On the whole, we do feel that Charter Hall Long WALE 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. Having said that, the company’s earnings growth is expected to slow down, as forecasted in the current analyst estimates. To know more about the company’s future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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.