Axis Real Estate Investment Trust's (KLSE:AXREIT) Stock Financial Prospects Look Bleak: Should Shareholders Be Prepared For A Share Price Correction?

editorial-team@simplywallst.com (Simply Wall St)

Tue, Nov 14, 2023, 6:14 PM 4 min read

Axis Real Estate Investment Trust's (KLSE:AXREIT) stock is up by 1.1% over the past three months. However, its weak financial performance indicators makes us a bit doubtful if that trend could continue. Specifically, we decided to study Axis Real Estate Investment Trust'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. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

Check out our latest analysis for Axis Real Estate Investment Trust

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 Axis Real Estate Investment Trust is:

6.1% = RM167m ÷ RM2.7b (Based on the trailing twelve months to September 2023).

The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each MYR1 of shareholders' capital it has, the company made MYR0.06 in profit.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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 all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

Axis Real Estate Investment Trust's Earnings Growth And 6.1% ROE

At first glance, Axis Real Estate Investment Trust's ROE doesn't look very promising. However, given that the company's ROE is similar to the average industry ROE of 6.1%, we may spare it some thought. Having said that, Axis Real Estate Investment Trust has shown a meagre net income growth of 4.0% over the past five years. Bear in mind, the company's ROE is not very high . Hence, this does provide some context to low earnings growth seen by the company.

Next, on comparing with the industry net income growth, we found that Axis Real Estate Investment Trust's reported growth was lower than the industry growth of 14% over the last few years, which is not something we like to see.

past-earnings-growth — KLSE:AXREIT Past Earnings Growth November 15th 2023

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Has the market priced in the future outlook for AXREIT? You can find out in our latest intrinsic value infographic research report.

Is Axis Real Estate Investment Trust Making Efficient Use Of Its Profits?

Axis Real Estate Investment Trust seems to be paying out most of its income as dividends judging by its three-year median payout ratio of 69% (or a retention ratio of 31%). However, this is typical for REITs as they are often required by law to distribute most of their earnings. So this probably explains the low earnings growth seen by the company.

In addition, Axis Real Estate Investment Trust has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth. Our latest analyst data shows that the future payout ratio of the company is expected to rise to 96% over the next three years. Despite the higher expected payout ratio, the company's ROE is not expected to change by much.

Conclusion

In total, we would have a hard think before deciding on any investment action concerning Axis Real Estate Investment Trust. As a result of its low ROE and lack of much reinvestment into the business, the company has seen a disappointing earnings growth rate. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.