With the stock down 8.2% last month, it’s easy to disregard Instone Real Estate Group (ETR: INS). The company’s fundamentals look pretty decent, however, and the long-term financial data is usually aligned with future market price movements. In particular, we decided to examine Instone Real Estate Group’s ROE in this article.
Return on Equity, or ROE, is an important metric for assessing how efficiently a company’s management is using the company’s capital. In short, ROE shows the profit each dollar generates on its equity investment.
Check out our latest analysis for Instone Real Estate Group
How do you calculate the return on equity?
The Formula for ROE is:
Return on Equity = Net Income (from continuing operations) ÷ Equity
Based on the formula above, the ROE for Instone Real Estate Group is:
7.4% = € 40 million ÷ € 535 million (based on the last twelve months to March 2021).
The “return” is the annual profit. You can also imagine that the company was able to generate € 0.07 profit for every € 1 of equity.
What is the Relationship Between ROE and Earnings Growth?
So far we have learned that the ROE measures how efficiently a company generates its profits. Based on how much of its profits the company will reinvest or “keep”, we can then evaluate a company’s future ability to generate profits. In general, all other things being equal, companies with high ROE and retained earnings will grow faster than companies that do not share these attributes.
A side-by-side comparison of earnings growth and 7.4% ROE for Instone Real Estate Group
At first glance, the Instone Real Estate Group’s ROE doesn’t look very promising. However, the ROE is in line with the industry average of 8.9% so we will not be firing the company entirely. In particular, the exceptional 69% net income growth that Instone Real Estate Group has seen over the past five years is quite remarkable. Given the slightly low ROE, it is likely that this growth will be driven by several other factors. Such as – high profit retention or efficient management.
As a next step, we compared the net profit growth of the Instone Real Estate Group with that of the industry and happily found that the growth of the company is above the average industry growth of 9.6%.
Earnings growth is an important metric to consider when evaluating a stock. It is important for an investor to know if the market has factored in the company’s expected earnings growth (or decline). In this way, they have an idea of whether the stock is leading into clear blue water or expecting swampy water. A good indicator of expected earnings growth is the P / E ratio, which determines the price the market is willing to pay for a stock based on its earnings outlook. Hence, you should check to see if Instone Real Estate Group is trading at high P / E or low P / E ratios compared to their industry.
Is the Instone Real Estate Group reinvesting its profits efficiently?
The average payout ratio of the Instone Real Estate Group over three years is 30%, which is moderately low. The company will keep the remaining 70%. So it appears that Instone Real Estate Group is reinvesting efficiently so that it has impressive earnings growth (as described above) and pays a well-covered dividend.
When examining the latest analyst consensus data, we found that the company’s future payout ratio is projected to rise to 41% over the next three years. Regardless of this, it is speculated that the future ROE of the Instone Real Estate Group will rise to 21% despite the expected increase in the payout ratio. There could likely be other factors that could drive future ROE growth.
Overall, we think the Instone Real Estate Group has some positive traits. The fact that the company reinvests a very large portion of its profits in its business, despite the low return, has undoubtedly contributed to the high earnings growth. However, as forecast in the latest analyst estimates, the company’s earnings growth is likely to slow. To learn more about the company’s future earnings growth projections, take a look at this free Report on analyst forecast for the company to learn more.
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This article from Simply Wall St is of a general nature. It is not a recommendation to buy or sell stocks and does not take into account your goals or your financial situation. Our goal is to provide you with long-term, focused analysis based on fundamentals. Note that our analysis may not take into account the latest company announcements or quality material, which is sensitive to the price. Simply Wall St has no position in the stocks mentioned.
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