Can weak Australian Unity Office Fund (ASX:AOF) financials dampen the stock’s current momentum on its share price?
Australian Unity Office Fund (ASX:AOF) stock is up 10% over the past week. However, we wanted to take a closer look at its main financial indicators because the markets generally pay for long-term fundamentals, and in this case, they do not look very promising. Specifically, we decided to study the ROE of the Australian Unity Office Fund in this article.
Return on equity or ROE is an important factor for a shareholder to consider as it tells them how much of their capital is being reinvested. In short, ROE shows the profit that each dollar generates in relation to the investments of its shareholders.
See our latest analysis for Australian Unity Office Fund
How do you calculate return on equity?
The return on equity formula is:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE for Australian Unity Office Fund is:
2.3% = AU$10.0 million ÷ AU$439 million (based on trailing twelve months to December 2021).
“Yield” refers to a company’s earnings over the past year. One way to conceptualize this is that for every Australian dollar of share capital it has, the company has made a profit of 0.02 Australian dollars.
Why is ROE important for earnings growth?
We have already established that ROE serves as an effective profit-generating indicator for a company’s future earnings. Depending on how much of its profits the company chooses to reinvest or “keep”, we are then able to assess a company’s future ability to generate profits. Assuming everything else remains unchanged, the higher the ROE and earnings retention, the higher a company’s growth rate compared to companies that don’t necessarily exhibit these characteristics.
Australian Unity Office Fund earnings growth and ROE of 2.3%
As you can see, the Australian Unity Office Fund’s ROE looks quite low. Not only that, even compared to the industry average of 15%, the company’s ROE is quite unremarkable. For this reason, the Australian Unity Office Fund’s 27% decline in net income over five years is not surprising given its lower ROE. However, there could also be other factors leading to lower income. For example, the company has misallocated capital or the company has a very high payout ratio.
So, as a next step, we compared the performance of the Australian Unity Office Fund to the industry and were disappointed to find that while the company cut profits, the industry increased profits to a rate of 11% over the same period.
Earnings growth is an important factor in stock valuation. It is important for an investor to know whether the market has priced in the expected growth (or decline) in the company’s earnings. This will help them determine if the future of the title looks bright or ominous. 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. So, you might want to check if Australian Unity Office Fund is trading on a high P/E or on a low P/E, relative to its sector.
Does the Australian Unity Office Fund use its profits effectively?
Australian Unity Office Fund has a very high three-year median payout ratio of 83%, implying that it retains only 17% of its profits. However, it is not uncommon to see a REIT with such a high payout ratio primarily due to legal requirements. As a result, this probably explains why its profits have declined.
Additionally, Australian Unity Office Fund has been paying dividends for six years, which is a considerable length of time, suggesting that management must have perceived that shareholders preferred consistent dividends even though profits have declined. After reviewing the latest analyst consensus data, we found that the company is expected to continue to pay out approximately 94% of its earnings over the next three years. Either way, the Australian Unity Office Fund’s future ROE is expected to reach 4.6% despite little change expected in its payout ratio.
Overall, the performance of the Australian Unity Office Fund is quite disappointing. Because the company does not reinvest much in the business and given the low ROE, it is not surprising to see the lack or absence of profit growth. That being the case, the latest forecasts from industry analysts show that analysts are expecting a huge improvement in the company’s earnings growth rate. For more on the company’s future earnings growth forecast, check out this free analyst forecast report for the company to learn more.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.