Many investors are still researching various metrics that can be useful when analyzing stocks. This article is for those looking to learn about return on equity (ROE). In a hands-on learning process, we will look at ROE to better understand the Minto Apartment Real Estate Investment Trust (TSE: MI.UN).
Return on Equity or ROE is a test of how effectively a company is increasing its value and managing investors’ money. In other words, it is the rate of return that measures the rate of return on capital provided by the company’s shareholders.
How is ROE calculated?
IN return on equity formula is an:
Return on equity = net income (from continuing operations) ÷ equity capital
So, based on the above formula, the return on equity for the Minto Apartment Real Estate investment trust is:
8.6% = C $ 71 million ÷ C $ 826 million (last 12 months to March 2021).
“Profitability” refers to the company’s profit over the past year. This means that for every CAD $ 1 of share capital, the company made a profit of CAD 0.09.
Does Minto Apartment Real Estate Investment Trust have a good return on equity?
One easy way to determine if a company has a good return on equity is to compare it to the industry average. However, this method is only useful as a rough check, because companies do vary widely within the same industry classification. In the graph below, you can see that the investment trust Minto Apartment Real Estate has a return on equity that is fairly close to the industry average REIT (7.7%).
This is not surprising, but respectable. Although the ROE is similar to the industry, we still need to do additional checks to see if the company’s ROE is increasing due to high levels of debt. If so, it increases his exposure to financial risk. Our risk dashboardmust have 4 risks that we have identified for the investment fund Minto Apartment Real Estate.
The Importance of Debt for Return on Equity
Most companies need money from somewhere in order to increase their profits. Cash for investments can come from the previous year’s profits (retained earnings), the issuance of new shares or loans. In the first and second cases, ROE will reflect the use of funds for business investments. In the latter case, the debt used for growth will increase profitability but will not affect total capital. Thus, the ROE will look better than if the debt was not used.
Minto Apartment Real Estate Investment Trust Debt and Its Return on Equity 8.6%
Minto Apartment Real Estate Investment Trust does use a large amount of debt to increase profits. The debt to equity ratio is 1.04. With a fairly low return on equity and a significant use of borrowed funds, it is difficult to get involved in this business at the moment. Debt does come with added risk, so it only really pays off when the company makes a decent profit from it.
Return on equity is one way to compare the business quality of different companies. Companies that can achieve high return on capital without too much debt are usually of good quality. If two companies have roughly the same debt-to-equity ratio and one has a higher return on equity, I usually prefer the one with a higher return on equity.
That being said, while ROE is a useful indicator of the quality of a business, there are a number of factors you will need to consider in order to determine the right price to buy a stock. It is especially important to consider the rate of profit growth versus expectations reflected in the share price. So you can take a look at this data-rich interactive forecast graph for the company…
But notice: Minto Apartment Real Estate Investment Trust may not be the best choice to buy… So take a look at this is free a list of interesting companies with high return on equity and low debt.
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