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Mapletree Industrial Trust's's (SGX:ME8U) stock is up by a considerable 28% over the past month. However, we decided to pay close attention to its weak financials as we are doubtful that the current momentum will keep up, given the scenario. Particularly, we will be paying attention to Mapletree Industrial Trust'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. Put another way, it reveals the company's success at turning shareholder investments into profits.
View our latest analysis for Mapletree Industrial Trust
How Is ROE Calculated?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Mapletree Industrial Trust is:
8.5% = S$297m ÷ S$3.5b (Based on the trailing twelve months to December 2019).
The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each SGD1 of shareholders' capital it has, the company made SGD0.09 in profit.
Why Is ROE Important For Earnings Growth?
So far, we've learnt 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. 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 Mapletree Industrial Trust's Earnings Growth And 8.5% ROE
At first glance, Mapletree Industrial Trust's ROE doesn't look very promising. However, given that the company's ROE is similar to the average industry ROE of 7.9%, we may spare it some thought. But Mapletree Industrial Trust saw a five year net income decline of 4.7% over the past five years. Bear in mind, the company does have a slightly low ROE. So that's what might be causing earnings growth to shrink.
However, when we compared Mapletree Industrial Trust's growth with the industry we found that while the company's earnings have been shrinking, the industry has seen an earnings growth of 5.9% in the same period. This is quite worrisome.
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). Doing so will help them establish if the stock's future looks promising or ominous. Is Mapletree Industrial Trust fairly valued compared to other companies? These 3 valuation measures might help you decide.