Instone Real Estate Group AG (ETR: INS) shares have slipped but fundamentals look correct: will the market correct the share price in the future?
With its stock down 8.2% over the past month, it’s easy to overlook Stone Real Estate Group (ETR: INS). However, the company’s fundamentals look pretty decent, and long-term financial data is generally aligned with future market price movements. Specifically, we have decided to study the ROE of Instone Real Estate Group in this article.
Return on equity or ROE is a key metric used to assess the efficiency with which the management of a business is using business capital. In short, the ROE shows the profit that each dollar generates compared to the investments of its shareholders.
See our latest review for Instone Real Estate Group
How do you calculate return on equity?
the formula for ROE is:
Return on equity = Net income (from continuing operations) ÷ Equity
Thus, based on the above formula, the ROE for Instone Real Estate Group is:
7.4% = 40 M € ÷ 535 M € (Based on the last twelve months until March 2021).
The “return” is the annual profit. Another way to look at this is that for every $ 1 in shares, the company was able to make $ 0.07 in profit.
What is the relationship between ROE and profit growth?
So far, we’ve learned that ROE measures how efficiently a business generates profits. Based on the portion of its profits that the company chooses to reinvest or “keep”, we are then able to assess a company’s future ability to generate profits. Generally speaking, all other things being equal, companies with high return on equity and high profit retention have a higher growth rate than companies that do not share these attributes.
A side-by-side comparison of Instone Real Estate Group’s 7.4% profit growth and ROE
At first glance, Instone Real Estate Group’s ROE does not look very promising. However, its ROE is similar to the industry average of 8.9%, so we won’t dismiss the company completely. In particular, the exceptional 69% net income growth seen by Instone Real Estate Group over the past five years is quite remarkable. Given the slightly low ROE, it is likely that other aspects are behind this growth. Such as – high profit retention or effective management in place.
As a next step, we compared Instone Real Estate Group net income growth with the industry, and luckily we found that the growth observed by the company is higher than the industry average growth of 9, 6%.
Profit growth is an important metric to consider when valuing a stock. It is important for an investor to know whether the market has factored in the expected growth (or decline) in company earnings. By doing this, they will have an idea if the stock is heading for clear blue waters or if swampy waters are ahead of them. A good indicator of expected earnings growth is the P / E ratio which determines the price the market is willing to pay for a stock based on its earnings outlook. So, you might want to check whether Instone Real Estate Group is trading high P / E or low P / E, relative to its industry.
Is the Instone real estate group effectively reinvesting its profits?
The three-year median payout ratio for Instone Real Estate Group is 30%, which is moderately low. The company keeps the remaining 70%. So it appears that Instone Real Estate Group is reinvesting effectively in order to achieve impressive earnings growth (see above) and pay a well-hedged dividend.
After studying the latest consensus data from analysts, we found that the company’s future payout ratio is expected to increase to 41% over the next three years. Either way, Instone Real Estate Group’s future ROE is expected to increase to 21% despite the expected increase in payout ratio. Other factors could probably be behind the future growth of ROE.
Overall, we think Instone Real Estate Group has positive attributes. Despite its low rate of return, the fact that the company reinvested a very large portion of its profits back into its business has undoubtedly contributed to the strong profit growth. That said, the company’s earnings growth is expected to slow, as current analyst estimates predict. To learn more about the company’s future earnings growth forecast, take a look at this free analyst forecast report for the company to learn more.
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This Simply Wall St article is general in nature. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.
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