Most readers would already know that Sun Communities’ (NYSE:SUI) stock increased by 5.7% over the past three months. As most would know, long-term fundamentals have a strong correlation with market price movements, so we decided to look at the company’s key financial indicators today to determine if they have any role to play in the recent price movement. Specifically, we decided to study Sun Communities’ ROE in this article.
Return on equity or ROE is a key measure used to assess how efficiently a company’s management is utilizing the company’s capital. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
Check out our latest analysis for Sun Communities
How Is ROE Calculated?
ROE can be calculated by using the formula:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity
So, based on the above formula, the ROE for Sun Communities is:
3.7% = US$168m ÷ US$4.5b (Based on the trailing twelve months to September 2020).
The ‘return’ is the income the business earned over the last year. So, this means that for every $1 of its shareholder’s investments, the company generates a profit of $0.04.
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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.
Sun Communities’ Earnings Growth And 3.7% ROE
It is hard to argue that Sun Communities’ ROE is much good in and of itself. Even when compared to the industry average of 5.4%, the ROE figure is pretty disappointing. Sun Communities was still able to see a decent net income growth of 13% over the past five years. We reckon that there could be other factors at play here. Such as – high earnings retention or an efficient management in place.
Next, on comparing Sun Communities’ net income growth with the industry, we found that the company’s reported growth is similar to the industry average growth rate of 12% in the same period.
Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company’s expected earnings growth (or decline). Doing so will help them establish if the stock’s future looks promising or ominous. What is SUI worth today? The intrinsic value infographic in our free research report helps visualize whether SUI is currently mispriced by the market.
Is Sun Communities Efficiently Re-investing Its Profits?
Sun Communities seems to be paying out most of its income as dividends judging by its three-year median payout ratio of 64%, meaning the company retains only 36% of its income. However, this is typical for REITs as they are often required by law to distribute most of their earnings. Despite this, the company’s earnings grew moderately as we saw above.
Additionally, Sun Communities has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Upon studying the latest analysts’ consensus data, we found that the company is expected to keep paying out approximately 60% of its profits over the next three years.
Overall, we feel that Sun Communities certainly does have some positive factors to consider. 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. With that said, the latest industry analyst forecasts reveal that the company’s earnings are expected to accelerate. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.
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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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