Many investors are still learning about the various metrics that can be useful when analyzing stocks. This article is for those who want to know about return on equity (ROE). To keep the lesson grounded in practice, we’ll use ROE to better understand Alpine Income Property Trust, Inc. (NYSE:PINE).
Return on equity or ROE tests how effectively a company is growing its value and managing investors’ money. Simply put, it is used to evaluate a company’s profitability compared to its equity.
See our latest analysis for Alpine Income Property Trust
How is ROE calculated?
Return on equity can be calculated using the following formula:
Return on equity = Net income (from continuing operations) ÷ Shareholders’ equity
So, based on the above formula, the ROE for Alpine Income Property Trust is:
1.3% = USD 3.7 million ÷ USD 272 million (based on trailing twelve months to September 2024).
“Earnings” is the amount of your after-tax earnings over the past 12 months. Another way to think of it is that for every $1 worth of stock, the company earned $0.01 in profit.
Does Alpine Income Property Trust have a good return on equity?
By comparing a company’s ROE with the industry average, you can easily measure how well a company performs. However, this method is only useful as a cursory check, as there is considerable variation between companies within the same industry classification. Looking at the image below, we can see that Alpine Income Property Trust’s ROE is lower than the average (5.6%) in the REIT industry classification.
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Unfortunately, it’s not optimal. That said, a low ROE isn’t necessarily a bad thing. Especially if the company’s leverage is low, as there is still room for improvement if the company takes on more debt. Companies with a lot of debt and a low ROE are a completely different story, and for us are a risky investment. You can see the 5 risks we have identified for Alpine Income Property Trust by accessing our risks dashboard for free on our platform here.
The importance of debt to increase return on equity
Virtually all companies need money to invest in their business to grow profits. Cash for investments can come from previous years’ profits (retained earnings), issuing new shares, or borrowings. In the first two cases, ROE captures the use of capital for growth. In the latter case, using debt increases returns but does not change equity. So, figuratively speaking, the use of debt can improve ROE, albeit with extra risk in case of stormy weather.
Alpine Income Property Trust combines debt with a 1.3% return on equity.
Alpine Income Property Trust uses a significant amount of debt to generate profits. The debt-to-equity ratio is 1.03. Despite using a large amount of debt, its ROE is very low. In our opinion, that’s not a good outcome. Credit markets change over time, so investors should carefully consider how a company would perform if it could not borrow as easily.
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conclusion
Return on equity helps you compare the quality of different businesses. Companies that can achieve high returns on equity without taking on large amounts of debt are generally of good quality. When two companies have the same ROE, I usually prefer the one with less debt.
However, if the quality of your business is high, the market will often bid up to a price that reflects that. You should also consider the rate at which earnings are likely to grow compared to the expected earnings growth reflected in the current price. So you might want to check out this free visualization of analyst forecasts for the company.
But note: Alpine Income Property Trust may not be the best stock to buy. So take a peek at this free list of interesting companies with high ROE and low debt.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodologies, and articles are not intended to be financial advice. This is not a recommendation to buy or sell any stock, and does not take into account your objectives or financial situation. We aim to provide long-term, focused analysis based on fundamental data. Note that our analysis may not factor in the latest announcements or qualitative material from price-sensitive companies. Simply Wall St has no position in any stocks mentioned.
