Dexus Convenience Retail REIT's (ASX:DXC) stock up by 4.5% over the past three months. Given its impressive performance, we decided to study the company's key financial indicators as a company's long-term fundamentals usually dictate market outcomes. In this article, we decided to focus on Dexus Convenience Retail 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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

View our latest analysis for Dexus Convenience Retail REIT

How To Calculate Return On Equity?

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 Dexus Convenience Retail REIT is:

17% = AU$93m ÷ AU$532m (Based on the trailing twelve months to December 2021).

The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each A$1 of shareholders' capital it has, the company made A$0.17 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 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.

Dexus Convenience Retail REIT's Earnings Growth And 17% ROE

To start with, Dexus Convenience Retail REIT's ROE looks acceptable. Further, the company's ROE compares quite favorably to the industry average of 13%. This probably laid the ground for Dexus Convenience Retail REIT's significant 38% net income growth seen over the past five years. We reckon that there could also be other factors at play here. Such as - high earnings retention or an efficient management in place.

As a next step, we compared Dexus Convenience Retail REIT's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 5.8%.

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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. What is DXC worth today? The intrinsic value infographic in our free research report helps visualize whether DXC is currently mispriced by the market.

Is Dexus Convenience Retail REIT Using Its Retained Earnings Effectively?

Dexus Convenience Retail REIT has a very high three-year median payout ratio of 91%. This means that it has only 8.9% 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. In spite of this, the company was able to grow its earnings significantly, as we saw above.

Besides, Dexus Convenience Retail REIT has been paying dividends over a period of four years. This shows that the company is committed to sharing profits with its shareholders. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 100%. Regardless, Dexus Convenience Retail REIT's ROE is speculated to decline to 6.2% despite there being no anticipated change in its payout ratio.

Summary

Overall, we are quite pleased with Dexus Convenience Retail REIT's performance. Especially the high ROE, Which has contributed to the impressive growth seen in earnings. Despite the company reinvesting only a small portion of its profits, it still has managed to grow its earnings so that is appreciable. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts 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.