Australia markets open in 7 hours 5 minutes
  • ALL ORDS

    7,442.00
    +23.40 (+0.32%)
     
  • AUD/USD

    0.6710
    +0.0053 (+0.79%)
     
  • ASX 200

    7,253.30
    +24.20 (+0.33%)
     
  • OIL

    78.62
    +1.38 (+1.79%)
     
  • GOLD

    1,754.00
    +13.70 (+0.79%)
     
  • BTC-AUD

    24,465.19
    +211.82 (+0.87%)
     
  • CMC Crypto 200

    387.77
    -0.96 (-0.25%)
     

Independence Realty Trust, Inc.'s (NYSE:IRT) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?

It is hard to get excited after looking at Independence Realty Trust's (NYSE:IRT) recent performance, when its stock has declined 23% over the past three months. However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. In this article, we decided to focus on Independence Realty Trust's ROE.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. Put another way, it reveals the company's success at turning shareholder investments into profits.

See our latest analysis for Independence Realty Trust

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 Independence Realty Trust is:

3.0% = US$111m ÷ US$3.7b (Based on the trailing twelve months to June 2022).

The 'return' is the yearly profit. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.03.

What Is The Relationship Between ROE And Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.

Independence Realty Trust's Earnings Growth And 3.0% ROE

It is quite clear that Independence Realty Trust's ROE is rather low. Even when compared to the industry average of 6.6%, the ROE figure is pretty disappointing. However, we we're pleasantly surprised to see that Independence Realty Trust grew its net income at a significant rate of 37% in the last five years. We reckon that there could be other factors at play here. Such as - high earnings retention or an efficient management in place.

We then compared Independence Realty Trust'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 11% in the same period.

past-earnings-growth
past-earnings-growth

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. One 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 prospects. So, you may want to check if Independence Realty Trust is trading on a high P/E or a low P/E, relative to its industry.

Is Independence Realty Trust Efficiently Re-investing Its Profits?

Independence Realty Trust seems to be paying out most of its income as dividends judging by its three-year median payout ratio of 96%, meaning the company retains only 4.1% of its income. However, this is typical for REITs as they are often required by law to distribute most of their earnings. In spite of this, the company was able to grow its earnings significantly, as we saw above.

Moreover, Independence Realty Trust is determined to keep sharing its profits with shareholders which we infer from its long history of nine years of paying a dividend. Our latest analyst data shows that the future payout ratio of the company is expected to drop to 50% over the next three years.

Conclusion

On the whole, we do feel that Independence Realty Trust has some positive attributes. Namely, its high earnings growth. We do however feel that the earnings growth number could have been even higher, had the company been reinvesting more of its earnings and paid out less dividends. Having said that, on studying current analyst estimates, we were concerned to see that while the company has grown its earnings in the past, analysts expect its earnings to shrink in the future. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

Join A Paid User Research Session
You’ll receive a US$30 Amazon Gift card for 1 hour of your time while helping us build better investing tools for the individual investors like yourself. Sign up here