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With an ROE of 4.71%, Suntec Real Estate Investment Trust (SGX:T82U) returned in-line to its own industry which delivered 7.02% over the past year. But what is more interesting is whether T82U can sustain or improve on this level of return. I will take you through how metrics such as financial leverage impact ROE which may affect the overall sustainability of T82U’s returns. Check out our latest analysis for Suntec Real Estate Investment Trust
What you must know about ROE
Return on Equity (ROE) is a measure of Suntec Real Estate Investment Trust’s profit relative to its shareholders’ equity. It essentially shows how much the company can generate in earnings given the amount of equity it has raised. If investors diversify their portfolio by industry, they may want to maximise their return in the Diversified REITs sector by investing in the highest returning stock. However, this can be deceiving as each company has varying costs of equity and debt levels, which could exaggeratedly push up ROE at the same time as accumulating high interest expense.
Return on Equity = Net Profit ÷ Shareholders Equity
ROE is measured against cost of equity in order to determine the efficiency of Suntec Real Estate Investment Trust’s equity capital deployed. Its cost of equity is 8.38%. Since Suntec Real Estate Investment Trust’s return does not cover its cost, with a difference of -3.67%, this means its current use of equity is not efficient and not sustainable. Very simply, Suntec Real Estate Investment Trust pays more for its capital than what it generates in return. ROE can be broken down into three different ratios: net profit margin, asset turnover, and financial leverage. This is called the Dupont Formula:
ROE = profit margin × asset turnover × financial leverage
ROE = (annual net profit ÷ sales) × (sales ÷ assets) × (assets ÷ shareholders’ equity)
ROE = annual net profit ÷ shareholders’ equity
SGX:T82U Last Perf Jan 12th 18
Essentially, profit margin shows how much money the company makes after paying for all its expenses. The other component, asset turnover, illustrates how much revenue Suntec Real Estate Investment Trust can make from its asset base. And finally, financial leverage is simply how much of assets are funded by equity, which exhibits how sustainable the company’s capital structure is. We can determine if Suntec Real Estate Investment Trust’s ROE is inflated by borrowing high levels of debt. Generally, a balanced capital structure means its returns will be sustainable over the long run. We can examine this by looking at Suntec Real Estate Investment Trust’s debt-to-equity ratio. The ratio currently stands at a sensible 56.75%, meaning Suntec Real Estate Investment Trust has not taken on excessive debt to drive its returns. The company is able to produce profit growth without a huge debt burden.
SGX:T82U Historical Debt Jan 12th 18
ROE – More than just a profitability ratio
ROE is a relatively simple calculation, but it can be broken down into different ratios, each telling a different story about the strengths and weaknesses of a company. Suntec Real Estate Investment Trust exhibits a weak ROE against its peers, as well as insufficient levels to cover its own cost of equity this year. Although, its appropriate level of leverage means investors can be more confident in the sustainability of Suntec Real Estate Investment Trust’s return with a possible increase should the company decide to increase its debt levels. Although ROE can be a useful metric, it is only a small part of diligent research.
For Suntec Real Estate Investment Trust, there are three pertinent factors you should further examine:
1. Financial Health: Does it have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
2. Valuation: What is Suntec Real Estate Investment Trust worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether Suntec Real Estate Investment Trust is currently mispriced by the market.
3. Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of Suntec Real Estate Investment Trust? Explore our interactive list of stocks with large growth potential to get an idea of what else is out there you may be missing!
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