Most readers already know that shares of Independence Realty Trust (NYSE:IRT) are up a significant 24% in the past three months. However, we decided to pay attention to the fundamentals of the company which do not seem to give a clear indication of the financial health of the company. In this article, we decided to focus on the ROE of Independence Realty Trust.
Return on equity or ROE is an important factor for a shareholder to consider as it tells them how much of their capital is being reinvested. In other words, it reveals the company’s success in turning shareholders’ investments into profits.
Check out our latest analysis for Independence Realty Trust
How is ROE calculated?
the ROE formula is:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE for Independence Realty Trust is:
1.3% = $46 million ÷ $3.6 billion (based on trailing 12 months to December 2021).
The “return” is the annual profit. One way to conceptualize this is that for every dollar of share capital it has, the company has made a profit of $0.01.
Why is ROE important for earnings growth?
So far we have learned that ROE is a measure of a company’s profitability. We now need to assess how much profit the company is reinvesting or “retaining” for future growth, which then gives us an idea of the company’s growth potential. Assuming all else is equal, companies that have both a higher return on equity and better earnings retention are generally the ones with a higher growth rate compared to companies that don’t. same characteristics.
A side-by-side comparison of Independence Realty Trust’s earnings growth and ROE of 1.3%
As you can see, Independence Realty Trust’s ROE seems quite low. Even compared to the industry average of 6.9%, the ROE figure is quite disappointing. Despite this, Independence Realty Trust has been able to grow its net income significantly, at a rate of 29% over the past five years. We believe there could be other factors at play here. For example, the business has a low payout ratio or is efficiently managed.
In a next step, we benchmarked Independence Realty Trust’s net income growth against the industry, and fortunately, we found that the growth the company saw was above the industry average growth of 11%. .
The basis for attaching value to a company is, to a large extent, linked to the growth of its profits. It is important for an investor to know whether the market has priced in the expected growth (or decline) in the company’s earnings. By doing so, they will get an idea if the stock is headed for clear blue waters or if swampy waters are waiting. Has the market integrated the future prospects of the IRT? You can find out in our latest infographic research report on intrinsic value.
Does Independence Realty Trust Use Retained Earnings Effectively?
Independence Realty Trust has a very high three-year median payout ratio of 105%, suggesting that the company’s shareholders are paid from more than the company’s earnings. However, this did not hamper its ability to grow as we saw earlier. However, it might be worth keeping an eye on the high payout rate, as this is a huge risk. Our risk dashboard should feature the 4 risks we have identified for Independence Realty Trust.
Additionally, Independence Realty Trust paid dividends over a nine-year period. This shows that the company is committed to sharing profits with its shareholders. Existing analyst estimates suggest the company’s future payout ratio is expected to drop to 49% over the next three years. Despite the lower expected payout ratio, the company’s ROE is not expected to change much.
Overall, we believe that the performance displayed by Independence Realty Trust is subject to many interpretations. Although the company has recorded impressive earnings growth, its low ROE and poor earnings retention make us doubt that this growth can continue, if by any chance the business faces any kind of risk. Looking at current analyst estimates, we found that analysts expect the company to continue its recent growth streak. For more on the company’s future earnings growth forecast, check out this free analyst forecast report for the company to learn more.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.