Charter Hall Social Infrastructure REIT (ASX:CQE) Is Up But Financials Look Inconsistent: Which Way Is The Stock Headed?

Most readers would already know that Charter Hall Social Infrastructure REIT's (ASX:CQE) stock increased by 8.0% over the past three months. Given that the stock prices usually follow long-term business performance, we wonder if the company's mixed financials could have any adverse effect on its current price price movement Specifically, we decided to study Charter Hall Social Infrastructure REIT's ROE in this article.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for Charter Hall Social Infrastructure REIT

How Is ROE Calculated?

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 Charter Hall Social Infrastructure REIT is:

8.2% = AU$86m ÷ AU$1.1b (Based on the trailing twelve months to June 2020).

The 'return' is the amount earned after tax over the last twelve months. So, this means that for every A$1 of its shareholder's investments, the company generates a profit of A$0.08.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

A Side By Side comparison of Charter Hall Social Infrastructure REIT's Earnings Growth And 8.2% ROE

When you first look at it, Charter Hall Social Infrastructure REIT's ROE doesn't look that attractive. Although a closer study shows that the company's ROE is higher than the industry average of 6.6% which we definitely can't overlook. However, Charter Hall Social Infrastructure REIT's five year net income decline rate was 5.9%. Bear in mind, the company does have a slightly low ROE. It is just that the industry ROE is lower. Therefore, the decline in earnings could also be the result of this.

However, when we compared Charter Hall Social Infrastructure REIT's growth with the industry we found that while the company's earnings have been shrinking, the industry has seen an earnings growth of 8.4% in the same period. This is quite worrisome.

Earnings growth is a huge factor in stock valuation. 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. Is CQE fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Charter Hall Social Infrastructure REIT Making Efficient Use Of Its Profits?

Charter Hall Social Infrastructure REIT seems to be paying out most of its income as dividends judging by its three-year median payout ratio of 78% (meaning, the company retains only 22% of profits). However, this is typical for REITs as they are often required by law to distribute most of their earnings. Accordingly, this likely explains why its earnings have been shrinking.

In addition, Charter Hall Social Infrastructure REIT has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to rise to 94% over the next three years. Consequently, the higher expected payout ratio explains the decline in the company's expected ROE (to 6.5%) over the same period.

Summary

Overall, we have mixed feelings about Charter Hall Social Infrastructure REIT. Specifically, the low earnings growth is a bit concerning, especially given that the company has a respectable rate of return. Investors may have benefitted, had the company been reinvesting more of its earnings. As discussed earlier, the company is retaining a small portion of its profits. With that said, we studied current analyst estimates and discovered that analysts expect the company's earnings growth to improve slightly. The company's existing shareholders might have some respite after all. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

This article by Simply Wall St is general in nature. 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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