Most readers should already know that First Industrial Realty Trust (NYSE: FR) shares were up 8.3% over the past month. Given that the market rewards strong financial stocks over the long term, we wonder if this is the case in this case. We will pay particular attention today to the ROE of the First Industrial Realty Trust.
Return on Equity, or ROE, is a test of how effectively a company is increasing its value and managing investors’ money. In simpler terms, it measures a company’s profitability in relation to its equity.
Check out our latest analysis for First Industrial Realty Trust
How do you calculate the return on equity?
The ROE can be calculated using the formula:
Return on Equity = Net Income (from continuing operations) ÷ Equity
So, based on the formula above, the ROE for First Industrial Realty Trust is:
12% = $ 246 million ÷ $ 2.0 billion (based on the last twelve months through September 2021).
The “return” is the annual profit. That means the company made a profit of $ 0.12 for every $ 1 of equity.
What is the Relationship Between ROE and Earnings Growth?
We have already established that ROE is an efficient profitable measure of a company’s future earnings. Depending on how much of these profits the company reinvests or “withholds” and how effectively this is done, we can then estimate the earnings growth potential of a company. Assuming all else is equal, companies that have both higher return on equity and higher earnings retention typically have a higher growth rate than companies that do not share the same characteristics.
A side-by-side comparison of First Industrial Realty Trust’s earnings growth and 12% ROE
At first glance, First Industrial Realty Trust seems to have a decent ROE. In addition, the company’s ROE compares favorably to the industry average of 5.8%. Presumably that’s why First Industrial Realty Trust has seen decent growth of 12% over the past five years.
As a next step, we compared the First Industrial Realty Trust’s net income growth to that of the industry and were pleased to find that the company’s growth was above the industry average of 9.0%.
Earnings growth is a big factor in stock valuation. The investor should try to figure out whether it is pricing in expected growth or decline in earnings, whatever the case. That way, they’ll have an idea of whether the stock is getting into clear blue water or expecting boggy water. What is FR worth today? The intrinsic value infographic in our free research report helps visualize whether FR is currently being mispriced by the market.
Is First Industrial Realty Trust Using Its Profits Efficiently?
The First Industrial Realty Trust has a high average payout ratio of 54% over three years. That means she only has 46% of her earnings left to reinvest in her business. However, it is not uncommon for a REIT to have such a high payout ratio, largely due to legal requirements. Even so, the company’s earnings grew moderately, as we saw above.
Additionally, the First Industrial Realty Trust is determined to continue to share its profits with shareholders, which we infer from its long history of nine years of paying dividends. Based on the latest analyst estimates, we have determined that the company’s future payout ratio is expected to remain stable at 52% over the next three years. Regardless, it is speculated that First Industrial Realty Trust’s ROE will drop to 7.3%, although the payout ratio is not expected to change.
Overall, we think the First Industrial Realty Trust performed quite well. Its high ROE in particular is noteworthy and likely the explanation for the sizeable earnings growth. Still, the company keeps a small part of its profits. That means the company was still able to grow its bottom line, so that’s fine. With that in mind, the latest forecasts from industry analysts show that the company’s earnings growth is likely to slow. To learn more about the latest analyst forecast for the company, check out this analyst forecast visualization for the company.
This article from Simply Wall St is of a general nature. We only provide comments based on historical data and analyst projections using an unbiased methodology, and our articles are not intended as financial advice. 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 may be sensitive to the price. Simply Wall St has no position in the stocks mentioned.
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