It is hard to get excited after looking at Mapletree Pan Asia Commercial Trust's (SGX:N2IU) recent performance, when its stock has declined 4.7% over the past month. To decide if this trend could continue, we decided to look at its weak fundamentals as they shape the long-term market trends. Specifically, we decided to study Mapletree Pan Asia Commercial Trust's ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors' money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

Check out our latest analysis for Mapletree Pan Asia Commercial Trust

How Do You Calculate Return On Equity?

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 Mapletree Pan Asia Commercial Trust is:

6.0% = S$347m ÷ S$5.8b (Based on the trailing twelve months to March 2022).

The 'return' is the yearly profit. So, this means that for every SGD1 of its shareholder's investments, the company generates a profit of SGD0.06.

Why Is ROE Important For 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 everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

Mapletree Pan Asia Commercial Trust's Earnings Growth And 6.0% ROE

When you first look at it, Mapletree Pan Asia Commercial Trust's ROE doesn't look that attractive. However, its ROE is similar to the industry average of 7.0%, so we won't completely dismiss the company. But then again, Mapletree Pan Asia Commercial Trust's five year net income shrunk at a rate of 12%. Remember, the company's ROE is a bit low to begin with. So that's what might be causing earnings growth to shrink.

So, as a next step, we compared Mapletree Pan Asia Commercial Trust's performance against the industry and were disappointed to discover that while the company has been shrinking its earnings, the industry has been growing its earnings at a rate of 4.6% in the same period.

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. Is N2IU fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Mapletree Pan Asia Commercial Trust Making Efficient Use Of Its Profits?

Mapletree Pan Asia Commercial Trust has a very high three-year median payout ratio of 78%, implying that it retains only 22% of its profits. However, it's not unusual to see a REIT with such a high payout ratio mainly due to statutory requirements. Accordingly, this likely explains why its earnings have been shrinking.

In addition, Mapletree Pan Asia Commercial Trust has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth. Looking at the current analyst consensus data, we can see that the company's future payout ratio is expected to rise to 112% over the next three years. Despite the higher expected payout ratio, the company's ROE is not expected to change by much.

Conclusion

In total, we would have a hard think before deciding on any investment action concerning Mapletree Pan Asia Commercial Trust. Because the company is not reinvesting much into the business, and given the low ROE, it's not surprising to see the lack or absence of growth in its earnings. Having said that, looking at current analyst estimates, we found that the company's earnings growth rate is expected to see a huge improvement. 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.

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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.