Kilroy Realty Corporation (NYSE:KRC) stock has shown weakness lately, but the financial outlook looks decent: is the market wrong?

Kilroy Realty (NYSE:KRC) had a tough three months with its share price down 21%. However, the company’s fundamentals look pretty decent and long-term financials are generally in line with future market price movements. Specifically, we decided to study the ROE of Kilroy Realty in this article.

Return on equity or ROE is an important factor for a shareholder to consider as it tells them how much of their capital is being reinvested. In other words, it is a profitability ratio that measures the rate of return on capital contributed by the company’s shareholders.

Our analysis indicates that The KRC is potentially undervalued!

How to calculate return on equity?

The ROE formula is:

Return on equity = Net income (from continuing operations) ÷ Equity

So, based on the above formula, the ROE for Kilroy Realty is:

3.9% = $222 million ÷ $5.7 billion (based on trailing 12 months to June 2022).

The “yield” is the profit of the last twelve months. One way to conceptualize this is that for every $1 of share capital it has, the firm has made a profit of $0.04.

What does ROE have to do with earnings growth?

So far we have learned that ROE is a measure of a company’s profitability. Based on the share of its profits that the company chooses to reinvest or “keep”, we are then able to assess a company’s future ability to generate profits. Assuming all else is equal, companies that have both a higher return on equity and better earnings retention are generally the ones with a higher growth rate compared to companies that don’t. same characteristics.

Kilroy Realty earnings growth and ROE of 3.9%

It is clear that the ROE of Kilroy Realty is rather low. Even compared to the industry average of 6.6%, the ROE figure is quite disappointing. Despite this, Kilroy Realty has been able to grow its net income significantly, at a rate of 24% over the past five years. We believe there could be other factors at play here. For example, it is possible that the management of the company has made good strategic decisions or that the company has a low payout ratio.

Then, comparing with the industry net income growth, we found that Kilroy Realty’s growth is quite high compared to the industry average growth of 11% over the same period, which is great to see.

The basis for attaching value to a company is, to a large extent, linked to the growth of its profits. The investor should try to establish whether the expected growth or decline in earnings, as the case may be, is taken into account. By doing so, he will get an idea if the title is heading for clear blue waters or if swampy waters await. If you’re wondering about Kilroy Realty’s valuation, check out this indicator of its price-earnings ratio, relative to its industry.

Does Kilroy Realty Use Retained Earnings Effectively?

Kilroy Realty appears to be paying out most of its income in the form of dividends judging by its three-year median payout ratio of 50%, which means the company only keeps 50% of its income. However, this is typical for REITs as they are often required by law to distribute most of their profits. Despite this, the company’s profits have increased significantly as seen above.

Also, Kilroy Realty has been paying dividends for at least ten years or more. This shows that the company is committed to sharing 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 remain stable at 47%. However, Kilroy Realty’s ROE is expected to increase to 5.9% despite no expected change in its payout ratio.

Summary

Overall, we think Kilroy Realty has positive attributes. While its earnings growth is undoubtedly quite significant, we believe that the reinvestment rate is quite low, which means that the earnings growth figure could have been considerably higher had the company retained a greater part of its profits. That said, the company’s earnings growth is expected to slow, as expected in current analyst estimates. To learn more about the latest analyst forecasts for the company, check out this analyst forecast visualization for the company.

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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.