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Does Monmouth Real Estate Investment Corporation's (NYSE:MNR) Weak Fundamentals Mean That The Market Could Correct Its Share Price?

Most readers would already be aware that Monmouth Real Estate Investment's (NYSE:MNR) stock increased significantly by 27% over the past month. However, in this article, we decided to focus on its weak fundamentals, as long-term financial performance of a business is what ultimatley dictates market outcomes. Specifically, we decided to study Monmouth Real Estate Investment'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. Put another way, it reveals the company's success at turning shareholder investments into profits.

View our latest analysis for Monmouth Real Estate Investment

How To Calculate Return On Equity?
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 Monmouth Real Estate Investment is:

6.4% = US$67m ÷ US$1.1b (Based on the trailing twelve months to December 2019).

The 'return' is the amount earned after tax over the last twelve months. Another way to think of that is that for every $1 worth of equity, the company was able to earn $0.06 in profit.

What Has ROE Got To Do With Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.

Monmouth Real Estate Investment's Earnings Growth And 6.4% ROE
When you first look at it, Monmouth Real Estate Investment's ROE doesn't look that attractive. However, given that the company's ROE is similar to the average industry ROE of 5.8%, we may spare it some thought. We can see that Monmouth Real Estate Investment has grown at a five year net income growth average rate of 5.0%, which is a bit on the lower side. Remember, the company's ROE is not particularly great to begin with. Hence, this does provide some context to low earnings growth seen by the company.

Next, on comparing with the industry net income growth, we found that Monmouth Real Estate Investment's reported growth was lower than the industry growth of 15% in the same period, which is not something we like to see.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. Has the market priced in the future outlook for MNR? You can find out in our latest intrinsic value infographic research report.

Is Monmouth Real Estate Investment Efficiently Re-investing Its Profits?
Monmouth Real Estate Investment seems to be paying out most of its income as dividends judging by its three-year median payout ratio of 93% (or a retention ratio of 6.9%). However, this is typical for REITs as they are often required by law to distribute most of their earnings. Accordingly, this suggests that the company's earnings growth was lower as a result of the high payout.

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