Yahoo Finance Why You Shouldn’t Look At Cromwell Property Group’s (ASX:CMW) Bottom Line
Cromwell Property Group is a AU$2.0b small-cap, real estate investment trust (REIT) based in Brisbane, Australia. REITs own and operate income-generating property and adhere to a different set of regulations. This impacts how CMW’s business operates and also how we should analyse its stock. I’ll take you through some of the key metrics you should use in order to properly assess CMW.
View our latest analysis for Cromwell Property Group
Funds from Operations (FFO) is a higher quality measure of CMW’s earnings compared to net income. This term is very common in the REIT investing world as it provides a cleaner look at its cash flow from daily operations by excluding impact of one-off activities or non-cash items such as depreciation. For CMW, its FFO of AU$121m makes up 28% of its gross profit, which is relatively low, given most REITs’ earnings are predominantly high-quality and recurring funds from operations.
CMW’s financial stability can be gauged by seeing how much its FFO generated each year can cover its total amount of debt. The higher the coverage, the less risky CMW is, broadly speaking, to have debt on its books. The metric I’ll be using, FFO-to-debt, also estimates the time it will take for the company to repay its debt with its FFO. With a ratio of 8.6%, the credit rating agency Standard & Poor would consider this as aggressive risk. This would take CMW 11.69 years to pay off using just operating income, which is a long time, and risk increases with time. But realistically, companies have many levers to pull in order to pay back their debt, beyond operating income alone.
I also look at CMW’s interest coverage ratio, which demonstrates how many times its earnings can cover its yearly interest expense. This is similar to the concept above, but looks at the upcoming obligations. The ratio is typically calculated using EBIT, but for a REIT stock, it’s better to use FFO divided by net interest. With an interest coverage ratio of 1.75x, CMW is not generating an appropriate amount of cash from its borrowings. Typically, a ratio of greater than 3x is seen as safe.
I also use FFO to look at CMW’s valuation relative to other REITs in Australia by using the price-to-FFO metric. This is conceptually the same as the price-to-earnings (PE) ratio, but as previously mentioned, FFO is more suitable. In CMW’s case its P/FFO is 16.95x, compared to the long-term industry average of 16.5x, meaning that it is fairly valued.
Next Steps:
As a REIT, Cromwell Property Group offers some unique characteristics which could help diversify your portfolio. However, before you decide on whether or not to invest in CMW, I highly recommend taking a look at other aspects of the stock to consider:
Future Outlook: What are well-informed industry analysts predicting for CMW’s future growth? Take a look at our free research report of analyst consensus for CMW’s outlook.
Management: Who are the people running the company? Experienced management and board are important for setting the right strategy during a volatile market. Take a look at information on CMW’s executive and directors here.
Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
