Common stock indicators are not suitable for REITs for the following reasons:
Earning per share (EPS) it contains a lot of unrealised gains / lost, such as change of property valuation, these are just paper profits or losses, and they cannot be included in the calculation. REITs should focus on the distributable income per unit, formula = distributable income / total unit, this indicator analyzes the earnings per share of REITs after deducting written earnings/losses. Most of the REITs annual reports will not show it, you have to calculate it yourself
P/E ratio, this is one of the most common indicators, the p/e ratio formula is share price / EPS. Since the inaccuracy of EPS has been mentioned above, how can it be used?
Roe-return on equity, the formula of this indicator is the net profit / total shareholder fund, and same as above net profit contains too much paper profit/loss, hence not reflecting the true earning.
Debt to equity ratio, formula = total debt / total shareholder fund The purpose of this indicator is to monitor company debt. It is definitely not suitable for REITs. Because REITs is a highly leveraged company that borrows money from assets, generating rental income higher than finance cost, and distribute dividend. we should look into gearing ratio (total borrowing / total assets) should be more appropriate.
So generally the indicators in the stock app are not suitable for REITs, don’t blindly follow and make wrong decisions. In the next post, we will talk about indicators suitable for REITs.
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