Centuria Office REIT's (ASX:COF) Stock Has Shown Weakness Lately But Financial Prospects Look Decent: Is The Market Wrong?

Centuria Office REIT (ASX:COF) has had a rough three months with its share price down 8.6%. However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. Particularly, we will be paying attention to Centuria Office REIT’s ROE today.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company’s shareholders.

Check out our latest analysis for Centuria Office REIT

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 Centuria Office REIT is:

8.0% = AU$119m ÷ AU$1.5b (Based on the trailing twelve months to December 2021).

The ‘return’ is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each A$1 of shareholders’ capital it has, the company made A$0.08 in profit.

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company’s future earnings. 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. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don’t necessarily bear these characteristics.

Centuria Office REIT’s Earnings Growth And 8.0% ROE

At first glance, Centuria Office REIT’s ROE doesn’t look very promising. We then compared the company’s ROE to the broader industry and were disappointed to see that the ROE is lower than the industry average of 13%. However, the moderate 8.6% net income growth seen by Centuria Office REIT over the past five years is definitely a positive. So, there might be other aspects that are positively influencing the company’s earnings growth. For instance, the company has a low payout ratio or is being managed efficiently.

We then compared Centuria Office REIT’s net income growth with the industry and we’re pleased to see that the company’s growth figure is higher when compared with the industry which has a growth rate of 5.8% in the same period.

past-earnings-growth

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company’s expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. If you’re wondering about Centuria Office REIT’s’s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Centuria Office REIT Making Efficient Use Of Its Profits?

Centuria Office REIT seems to be paying out most of its income as dividends judging by its three-year median payout ratio of 86%, meaning the company retains only 14% of its income. However, this is typical for REITs as they are often required by law to distribute most of their earnings. Despite this, the company’s earnings grew moderately as we saw above.

Moreover, Centuria Office REIT is determined to keep sharing its profits with shareholders which we infer from its long history of seven years of paying a dividend. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 88%. Accordingly, forecasts suggest that Centuria Office REIT’s future ROE will be 7.1% which is again, similar to the current ROE.

Summary

Overall, we feel that Centuria Office REIT 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. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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.

Leave a Reply

Your email address will not be published. Required fields are marked *