W. P. Carey (NYSE:WPC) has had a rough month with its share price down 1.6%. But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. Particularly, we will be paying attention to W. P. Carey’s ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for W. P. Carey

How To Calculate Return On Equity?

The formula for return on equity is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity

So, based on the above formula, the ROE for W. P. Carey is:

6.6% = US$573m ÷ US$8.7b (Based on the trailing twelve months to March 2024).

The ‘return’ is the profit over the last twelve months. That means that for every $1 worth of shareholders’ equity, the company generated $0.07 in profit.

What Has ROE Got To Do With 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.

A Side By Side comparison of W. P. Carey’s Earnings Growth And 6.6% ROE

When you first look at it, W. P. Carey’s ROE doesn’t look that attractive. However, its ROE is similar to the industry average of 5.9%, so we won’t completely dismiss the company. Even so, W. P. Carey has shown a fairly decent growth in its net income which grew at a rate of 16%. Taking into consideration that the ROE is not particularly high, we reckon that there could also be other factors at play which could be influencing the company’s growth. For example, it is possible that the company’s management has made some good strategic decisions, or that the company has a low payout ratio.

We then compared W. P. Carey’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 7.6% in the same 5-year period.

past-earnings-growth

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). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is W. P. Carey fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is W. P. Carey Making Efficient Use Of Its Profits?

W. P. Carey has a high three-year median payout ratio of 80%. This means that it has only 20% 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. Despite this, the company’s earnings grew moderately as we saw above.

Moreover, W. P. Carey is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Our latest analyst data shows that the future payout ratio of the company is expected to rise to 159% over the next three years. Regardless, the future ROE for W. P. Carey is speculated to rise to 8.9% despite the anticipated increase in the payout ratio. There could probably be other factors that could be driving the future growth in the ROE.

Summary

Overall, we feel that W. P. Carey certainly does have some positive factors to consider. While no doubt its earnings growth is pretty substantial, we do feel that the reinvestment rate is pretty low, meaning, the earnings growth number could have been significantly higher had the company been retaining more of its profits. Having said that, the company’s earnings growth is expected to slow down, as forecasted in the current analyst estimates. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts 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.

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