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AEW UK REIT's (LON:AEWU) stock is up by 4.7% over the past month. However, we decided to study the company's mixed-bag of fundamentals to assess what this could mean for future share prices, as stock prices tend to be aligned with a company's long-term financial performance. Particularly, we will be paying attention to AEW UK 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. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.
View our latest analysis for AEW UK REIT
How Is ROE Calculated?
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 AEW UK REIT is:
11% = UK£18m ÷ UK£173m (Based on the trailing twelve months to September 2024).
The 'return' is the yearly profit. So, this means that for every £1 of its shareholder's investments, the company generates a profit of £0.11.
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. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.
A Side By Side comparison of AEW UK REIT's Earnings Growth And 11% ROE
To begin with, AEW UK REIT seems to have a respectable ROE. Further, the company's ROE compares quite favorably to the industry average of 3.2%. As you might expect, the 8.0% net income decline reported by AEW UK REIT is a bit of a surprise. Therefore, there might be some other aspects that could explain this. These include low earnings retention or poor allocation of capital.
Next, on comparing with the industry net income growth, we found that AEW UK REIT's earnings seems to be shrinking at a similar rate as the industry which shrunk at a rate of a rate of 8.0% in the same period.
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. If you're wondering about AEW UK REIT's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.