Is Investors Real Estate Trust (NYSE: CSR) a quality stock with a 1.1% ROE?

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One of the best investments we can make is our own knowledge and skills. With that in mind, this article will look at how we can use return on equity (ROE) to better understand the business. As a hands-on learning curve, we will look at ROE to better understand Investors Real Estate Trust (NYSE: CSR).

ROE, or return on equity, is a useful tool for assessing how effectively a company can profit from the investments it receives from its shareholders. In short, ROE measures the return that every dollar generates in relation to the investments of its shareholders.

How is ROE calculated?

The return on equity can be calculated using the formula:

Return on equity = net income (from continuing operations) ÷ equity capital

So, based on the above formula, the ROE for Investors Real Estate Trust is:

1.1% = $ 7.3M ÷ $ 688M (last 12 months to March 2021).

“Profitability” refers to the company’s profit over the past year. So this means that for every dollar of its shareholder’s investment, the company makes a profit of $ 0.01.

Does Investors Real Estate Trust have a good return on equity?

Perhaps the easiest way to gauge a company’s return on equity is to compare it to the industry average. It is important to note that this is far from ideal, as companies vary widely within the same industry classification. As you can see in the image below, Investors Real Estate Trust has a lower return on equity than the average (5.1%) in the REIT industry.

caviarNYSE: CSR Return on Equity June 12, 2021

This is not what we would like to see. That being said, low return on equity is not always a bad thing, especially if the company has low leverage, as it still leaves room for improvement if the company takes on more debt. A company with a high level of debt and a low return on equity is a combination we try to avoid given the associated risk. To learn about the 6 risks we have identified for Investors Real Estate Trust, visit our risk dashboard for free.

The Importance of Debt for Return on Equity

Almost all companies need money to invest in business and increase profits. Cash for investments can come from the previous year’s earnings (retained earnings), the issuance of new shares or loans. In the first two cases, ROE will reflect this use of capital for growth. 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.

Debt Investors Real Estate Trust and its return on equity 1.1%

Investors Real Estate Trust’s high debt utilization rate is worth noting, resulting in a debt-to-equity ratio of 1.17. The combination of a fairly low return on equity and a significant use of debt is not particularly attractive. Debt does come with added risk, so it only really pays off when the company makes a decent profit from it.

Summary

Return on equity is one way to compare the business quality of different companies. We estimate that the highest quality companies have a high return on equity despite low debt levels. 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 the higher return on equity.

That being said, while the return on equity 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. You should also consider the rate at which profits can grow relative to the profit growth expectations reflected in the current price. So you can take a look at this data-rich interactive forecast graph for the company

Sure Investors Real Estate Trust may not be the best promotion to buy… So you might want to see it is free collection of other companies with high return on equity and low debt.

This article by Simply Wall St is general in nature. It is not a recommendation to buy or sell any stock and does not take into account your goals or your financial situation. We strive to provide you with long-term focused analysis driven by fundamental data. Please note that our analysis may not include the latest announcements from price-sensitive companies or quality content. Simply Wall St has no position in any of the mentioned promotions.

Have any feedback on this article? Concerned about the content? Contact with us directly. You can also email the revision (at) simplewallst.com.

The views and opinions expressed herein are those of the author and do not necessarily reflect the views of Nasdaq, Inc.

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