It is hard to get excited after looking at Rayonier’s (NYSE:RYN) recent performance, when its stock has declined 11% over the past month. However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. Specifically, we decided to study Rayonier’s ROE in this article.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder’s equity.
See our latest analysis for Rayonier
How Is ROE Calculated?
ROE can be calculated by using the formula:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity
So, based on the above formula, the ROE for Rayonier is:
11% = US$226m ÷ US$2.0b (Based on the trailing twelve months to March 2022).
The ‘return’ is the yearly profit. One way to conceptualize this is that for each $1 of shareholders’ capital it has, the company made $0.11 in profit.
What Is The Relationship Between ROE And Earnings Growth?
So far, we’ve learned that ROE is a measure of a company’s profitability. We now need to evaluate how much profit the company reinvests or “retains” for future growth which then gives us an idea about the growth potential of the company. 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.
Rayonier’s Earnings Growth And 11% ROE
To start with, Rayonier’s ROE looks acceptable. Especially when compared to the industry average of 6.5% the company’s ROE looks pretty impressive. Needless to say, we are quite surprised to see that Rayonier’s net income shrunk at a rate of 15% over the past five years. Therefore, there might be some other aspects that could explain this. These include low earnings retention or poor allocation of capital.
That being said, we compared Rayonier’s performance with the industry and were concerned when we found that while the company has shrunk its earnings, the industry has grown its earnings at a rate of 11% in the same period.
NYSE:RYN Past Earnings Growth June 30th 2022
Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. What is RYN worth today? The intrinsic value infographic in our free research report helps visualize whether RYN is currently mispriced by the market.
Is Rayonier Efficiently Re-investing Its Profits?
Rayonier has a very high three-year median payout ratio of 52%, implying that it retains only 48% of its profits. However, it’s not unusual to see a REIT with such a high payout ratio mainly due to statutory requirements. So this probably explains the company’s shrinking earnings.
Additionally, Rayonier has paid dividends over a period of at least ten years, which means that the company’s management is determined to pay dividends even if it means little to no earnings growth. Looking at the current analyst consensus data, we can see that the company’s future payout ratio is expected to rise to 166% over the next three years. Consequently, the higher expected payout ratio explains the decline in the company’s expected ROE (to 5.4%) over the same period.
Conclusion
In total, it does look like Rayonier has some positive aspects to its business. Although, we are disappointed to see a lack of growth in earnings even in spite of a high ROE. Bear in mind, the company reinvests a small portion of its profits, which means that investors aren’t reaping the benefits of the high rate of return. Additionally, the latest industry analyst forecasts show that analysts expect the company’s earnings to continue to shrink in the future. To know more about the company’s future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.