Most readers would already know that Precinct Properties New Zealand’s (NZSE:PCT) stock increased by 9.0% over the past three months. However, we decided to study the company’s mixed-bag of fundamentals to assess what this could mean for future share prices, as stock prices tend to be aligned with a company’s long-term financial performance. Particularly, we will be paying attention to Precinct Properties New Zealand’s ROE today.
ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
How Is ROE Calculated?
ROE can be calculated by using the formula:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity
So, based on the above formula, the ROE for Precinct Properties New Zealand is:
1.6% = NZ$30m ÷ NZ$1.9b (Based on the trailing twelve months to June 2020).
The ‘return’ refers to a company’s earnings over the last year. Another way to think of that is that for every NZ$1 worth of equity, the company was able to earn NZ$0.02 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.
Precinct Properties New Zealand’s Earnings Growth And 1.6% ROE
It is quite clear that Precinct Properties New Zealand’s ROE is rather low. Not just that, even compared to the industry average of 5.4%, the company’s ROE is entirely unremarkable. Although, we can see that Precinct Properties New Zealand saw a modest net income growth of 6.6% over the past five years. We believe that there might be other aspects that are positively influencing the company’s earnings growth. For example, it is possible that the company’s management has made some good strategic decisions, or that the company has a low payout ratio.
We then compared Precinct Properties New Zealand’s net income growth with the industry and found that the company’s growth figure is lower than the average industry growth rate of 12% in the same period, which is a bit concerning.
Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Precinct Properties New Zealand is trading on a high P/E or a low P/E, relative to its industry.
Is Precinct Properties New Zealand Using Its Retained Earnings Effectively?
Precinct Properties New Zealand has a high three-year median payout ratio of 83%. This means that it has only 17% of its income left to reinvest into its business. However, it’s not unusual to see a REIT with such a high payout ratio mainly due to statutory requirements. Despite this, the company’s earnings grew moderately as we saw above.
Moreover, Precinct Properties New Zealand is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Upon studying the latest analysts’ consensus data, we found that the company is expected to keep paying out approximately 96% of its profits over the next three years. Regardless, the future ROE for Precinct Properties New Zealand is predicted to rise to 4.9% despite there being not much change expected in its payout ratio.
In total, we’re a bit ambivalent about Precinct Properties New Zealand’s performance. While no doubt its earnings growth is pretty respectable, the low profit retention could mean that the company’s earnings growth could have been higher, had it been paying reinvesting a higher portion of its profits. An improvement in its ROE could also help future earnings growth. Having said that, looking at the current analyst estimates, we found that the company’s earnings are expected to gain momentum. Are these analysts expectations based on the broad expectations for the industry, or on the company’s fundamentals? Click here to be taken to our analyst’s forecasts page for the company.
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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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