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Alternative Income REIT (LON:AIRE) has had a rough three months with its share price down 2.5%. But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. In this article, we decided to focus on Alternative Income REIT's ROE.
Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
See our latest analysis for Alternative Income REIT
How To Calculate Return On Equity?
The formula for return on equity is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Alternative Income REIT is:
3.6% = UK£2.4m ÷ UK£65m (Based on the trailing twelve months to June 2024).
The 'return' is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each £1 of shareholders' capital it has, the company made £0.04 in profit.
Why Is ROE Important For Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. 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. 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.
Alternative Income REIT's Earnings Growth And 3.6% ROE
It is hard to argue that Alternative Income REIT's ROE is much good in and of itself. Further, we noted that the company's ROE is similar to the industry average of 3.6%. Therefore, the low net income growth of 4.5% seen by Alternative Income REIT over the past five years could probably be the result of it having a lower ROE.
Given that the industry shrunk its earnings at a rate of 8.0% over the last few years, the net income growth of the company is quite impressive.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Alternative Income REIT fairly valued compared to other companies? These 3 valuation measures might help you decide.