It is hard to get excited after looking at Terreno Realty’s (NYSE:TRNO) recent performance, when its stock has declined 7.5% 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 Terreno Realty’s ROE in this article.
Return on equity or ROE is a key measure used to assess how efficiently a company’s management is utilizing the company’s capital. Put another way, it reveals the company’s success at turning shareholder investments into profits.
See our latest analysis for Terreno Realty
How To Calculate Return On Equity?
Return on equity 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 Terreno Realty is:
3.9% = US$69m ÷ US$1.8b (Based on the trailing twelve months to September 2021).
The ‘return’ is the amount earned after tax over the last twelve months. Another way to think of that is that for every $1 worth of equity, the company was able to earn $0.04 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. Depending on how much of these profits the company reinvests or “retains”, and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.
Terreno Realty’s Earnings Growth And 3.9% ROE
It is quite clear that Terreno Realty’s ROE is rather low. Even when compared to the industry average of 6.8%, the ROE figure is pretty disappointing. However, we we’re pleasantly surprised to see that Terreno Realty grew its net income at a significant rate of 24% in the last five years. Therefore, there could be other reasons behind this growth. For instance, the company has a low payout ratio or is being managed efficiently.
As a next step, we compared Terreno Realty’s net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 9.1%.
NYSE:TRNO Past Earnings Growth February 7th 2022
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. What is TRNO worth today? The intrinsic value infographic in our free research report helps visualize whether TRNO is currently mispriced by the market.
Is Terreno Realty Making Efficient Use Of Its Profits?
Terreno Realty has a very high three-year median payout ratio of 71%. This means that it has only 29% of its income left to reinvest into its business. However, it’s not unusual to see a REIT with such a high payout ratio mainly due to statutory requirements. Regardless, this hasn’t hampered its ability to grow as we saw earlier.
Besides, Terreno Realty has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 68%.
Conclusion
Overall, we feel that Terreno Realty certainly does have some positive factors to consider. That is, quite an impressive growth in earnings. However, the low profit retention means that the company’s earnings growth could have been higher, had it been reinvesting a higher portion of its profits. With that said, the latest industry analyst forecasts reveal that the company’s earnings growth is expected to slow down. Are these analysts expectations based on the broad expectations for the industry, or on the company’s fundamentals? Click here to be taken to our analyst’s forecasts page for the company.
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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.