Alexandria Real Estate Equities, Inc.'s (NYSE:ARE) Stock On An Uptrend: Could Fundamentals Be Driving The Momentum?

Simply Wall St

Sat, Jun 12, 2021, 1:23 AM 4 min read

Alexandria Real Estate Equities (NYSE:ARE) has had a great run on the share market with its stock up by a significant 18% over the last three months. As most would know, fundamentals are what usually guide market price movements over the long-term, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. Particularly, we will be paying attention to Alexandria Real Estate Equities' ROE today.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for Alexandria Real Estate Equities

How To Calculate Return On Equity?

Return on equity 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 Alexandria Real Estate Equities is:

5.6% = US$822m ÷ US$15b (Based on the trailing twelve months to March 2021).

The 'return' refers to a company's earnings over the last year. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $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. 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.

Alexandria Real Estate Equities' Earnings Growth And 5.6% ROE

At first glance, Alexandria Real Estate Equities' ROE doesn't look very promising. Yet, a closer study shows that the company's ROE is similar to the industry average of 5.1%. Particularly, the exceptional 50% net income growth seen by Alexandria Real Estate Equities over the past five years is pretty remarkable. Taking into consideration that the ROE is not particularly high, we reckon that there could also be other factors at play which could be influencing the company's growth. Such as - high earnings retention or an efficient management in place.

We then compared Alexandria Real Estate Equities' net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 10.0% in the same period.

past-earnings-growth — NYSE:ARE Past Earnings Growth June 12th 2021

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. What is ARE worth today? The intrinsic value infographic in our free research report helps visualize whether ARE is currently mispriced by the market.

Is Alexandria Real Estate Equities Efficiently Re-investing Its Profits?

Alexandria Real Estate Equities has a very high three-year median payout ratio of 51%. This means that it has only 49% 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. Despite this, the company's earnings have grown significantly as we saw above.

Moreover, Alexandria Real Estate Equities 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 is expected to keep paying out approximately 55% of its profits over the next three years. Still, forecasts suggest that Alexandria Real Estate Equities' future ROE will drop to 2.6% even though the the company's payout ratio is not expected to change by much.

Conclusion

In total, it does look like Alexandria Real Estate Equities has some positive aspects to its business. That is, quite an impressive growth in earnings. However, the low profit retention means that the company's earnings growth could have been higher, had it been reinvesting a higher portion of its profits. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. 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.

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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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