Most readers already know that shares of Life Storage (NYSE: LSI) have risen significantly 25% in the past three months. As most know, fundamentals generally guide long-term market price movements, so we decided to look at the company’s key financial metrics today to see if they have a role to play in the recent one. price movement. In this article, we have decided to focus on the ROE of Life Storage.
Return on equity or ROE is a test of how effectively a company increases its value and manages investor money. In other words, it reveals the company’s success in turning shareholders’ investments into profits.
How to calculate return on equity?
The return on equity formula is:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE for Life Storage is:
6.8% = US $ 184 million ÷ US $ 2.7 billion (based on the last twelve months to June 2021).
The “return” is the profit of the last twelve months. This means that for every dollar in shareholders’ equity, the company generated $ 0.07 in profit.
What does ROE have to do with profit growth?
We have already established that ROE is an effective indicator of profit generation for a company’s future profits. We now need to assess the profits that the company is reinvesting or “withholding” for future growth, which then gives us an idea of the growth potential of the company. Assuming everything else remains the same, the higher the ROE and profit retention, the higher the growth rate of a business compared to businesses that don’t necessarily have these characteristics.
Growth in Life Storage earnings and 6.8% ROE
When you first look at it, Life Storage’s ROE doesn’t look so appealing. However, the fact that its ROE is well above the industry average of 5.5% does not go unnoticed to us. Therefore, this likely laid the groundwork for the decent 18% growth seen over the past five years by Life Storage. That being said, the company has a slightly low ROE to start with, just that it’s above the industry average. So there may well be other reasons for incomes to increase. For example, it is possible that the entire industry is going through a phase of strong growth or that the company has a low payout ratio.
We then compared the net income growth of Life Storage with the industry and we are delighted to see that the growth number of the company is higher than that of the industry which has a growth rate of 8.8. % during the same period.
NYSE: LSI Past Profit Growth Aug 22, 2021
Profit growth is an important metric to consider when valuing a stock. The investor should try to establish whether the expected growth or decline in earnings, as the case may be, is taken into account. This then helps him determine whether the stock is set for a bright or dark future. What is LSI worth today? The intrinsic value infographic in our free research report helps to visualize whether LSI is currently being poorly valued by the market.
Is Life Storage Efficiently Using Its Profits?
Life Storage appears to pay out most of its income as dividends judging by its three-year median payout rate of 72%, which means the company only keeps 28% of its income. However, this is typical for REITs as they are often required by law to distribute most of their income. Despite this, the company’s profits increased moderately as we saw above.
In addition, Life Storage has paid dividends over a period of at least ten years, which means the company is very serious about sharing its profits with its shareholders. Based on the latest analyst estimates, we found that the company’s future payout ratio over the next three years is expected to hold steady at 62%. However, Life Storage’s ROE is expected to increase to 8.4% despite no expected change in its payout ratio.
Overall, we think Life Storage definitely has some positive factors to consider. Specifically, its respectable ROE which has probably led to considerable growth in earnings. Yet the company retains a small portion of its profits. Which means the company was able to increase its profits despite this, so it’s not that bad. However, a study of the latest analysts’ forecasts shows that the company is likely to experience a slowdown in future earnings growth. To learn more about the latest analyst forecast for the business, check out this visualization of the analyst forecast for the business.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative material. Simply Wall St has no position in the mentioned stocks.
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