Dream Office Real Estate Investment Trust (TSE:D.UN) had a tough three months, with the stock down 17%. However, a closer look at the solid financials might make you think. Given that fundamentals typically drive long-term market outcomes, the company is worth considering. Today we will be paying particular attention to the ROE of Dream Office Real Estate Investment Trust.
Return on equity, or ROE, is a test of how effectively a company is increasing its value and managing investors’ money. In other words, it shows the company’s success in turning shareholders’ investments into profits.
Check out our latest analysis for Dream Office Real Estate Investment Trust
How do you calculate return on equity?
That Formula for return on equity is:
Return on Equity = Net Income (from continuing operations) ÷ Equity
So, based on the formula above, the ROE for Dream Office Real Estate Investment Trust is:
15% = CA$237M ÷ CA$1.6B (Based on trailing 12 months to June 2022).
The “return” is the annual profit. One way to conceptualize this is that for every CA$1 of shareholder capital it has, the company made a profit of CA$0.15.
Why is ROE important for earnings growth?
We have already established that ROE serves as an efficient profitable measure of a company’s future profits. We now need to evaluate how much profit the company is reinvesting or “keeping” for future growth, which then gives us an idea of the company’s growth potential. Assuming all else remains the same, the higher the ROE and earnings retention, the higher a company’s growth rate compared to companies that don’t necessarily exhibit these characteristics.
Dream Office Real Estate Investment Trust revenue growth and 15% ROE
At first glance, Dream Office Real Estate Investment Trust appears to have a decent ROE. Even compared to the industry average of 15%, the company’s ROE looks pretty decent. This likely explains, among other factors, Dream Office Real Estate Investment Trust’s modest growth of 17% over the past five years.
As a next step, we compared Dream Office Real Estate Investment Trust’s net income growth to that of the industry and found that the company has a similar growth number compared to the industry average growth rate of 17% over the same period.
Earnings growth is an important factor in stock valuation. The investor should try to determine whether expected growth or earnings decline, whichever is the case, is being priced in. This then helps him determine whether the stock is placed for a bright or bleak future. If you’re wondering about Dream Office Real Estate Investment Trust’s valuation, check out this benchmark of price-to-earnings versus its industry.
Does Dream Office Real Estate Investment Trust Use Its Retained Earnings Effectively?
Dream Office Real Estate Investment Trust has a high 3-year median payout ratio of 57%. That means it only has 43% of its earnings left to reinvest in its business. However, it’s not uncommon for a REIT to have such a high payout ratio, largely due to regulatory requirements. Nevertheless, as we saw above, the company was able to significantly increase its earnings.
Also, the Dream Office Real Estate Investment Trust has been paying dividends for at least a decade. This shows that the company has an obligation to share profits with its shareholders.
Overall, we are quite pleased with the performance of Dream Office Real Estate Investment Trust. Most notably, the high ROE that has contributed to the impressive earnings growth. Although the company only reinvests a small portion of its profits, it has still managed to grow its profits enough to be felt. So far, we’ve only talked briefly about the company’s earnings growth. So it may be worth checking this out free detailed graphics Dream Office Real Estate Investment Trust’s past earnings, revenue and cash flows to gain a deeper insight into how the company is performing.
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This Simply Wall St article is of a general nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended as financial advice. It is not a recommendation to buy or sell any stock and does not take into account your goals or financial situation. Our goal is to offer you long-term focused analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any of the stocks mentioned.
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