Does The Market Have A Low Tolerance For Propel Funeral Partners Limited's (ASX:PFP) Mixed Fundamentals?

It is hard to get excited after looking at Propel Funeral Partners' (ASX:PFP) recent performance, when its stock has declined 5.0% over the past month. It is possible that the markets have ignored the company's differing financials and decided to lean-in to the negative sentiment. Stock prices are usually driven by a company’s financial performance over the long term, and therefore we decided to pay more attention to the company's financial performance. Specifically, we decided to study Propel Funeral Partners' ROE in this article.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View our latest analysis for Propel Funeral Partners

How Do You Calculate Return On Equity?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Propel Funeral Partners is:

5.8% = AU$11m ÷ AU$182m (Based on the trailing twelve months to June 2020).

The 'return' is the yearly profit. Another way to think of that is that for every A$1 worth of equity, the company was able to earn A$0.06 in profit.

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

A Side By Side comparison of Propel Funeral Partners' Earnings Growth And 5.8% ROE

At first glance, Propel Funeral Partners' ROE doesn't look very promising. A quick further study shows that the company's ROE doesn't compare favorably to the industry average of 9.1% either. Despite this, surprisingly, Propel Funeral Partners saw an exceptional 37% net income growth over the past five years. Therefore, there could be other reasons behind this 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.

As a next step, we compared Propel Funeral Partners' net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 18%.

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is PFP fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Propel Funeral Partners Efficiently Re-investing Its Profits?

Propel Funeral Partners' significant three-year median payout ratio of 92% (where it is retaining only 8.5% of its income) suggests that the company has been able to achieve a high growth in earnings despite returning most of its income to shareholders.

While Propel Funeral Partners has seen growth in its earnings, it only recently started to pay a dividend. It is most likely that the company decided to impress new and existing shareholders with a dividend. Our latest analyst data shows that the future payout ratio of the company is expected to drop to 70% over the next three years. As a result, the expected drop in Propel Funeral Partners' payout ratio explains the anticipated rise in the company's future ROE to 8.9%, over the same period.

Summary

Overall, we have mixed feelings about Propel Funeral Partners. While no doubt its earnings growth is pretty substantial, its ROE and earnings retention is quite poor. So while the company has managed to grow its earnings in spite of this, we are unconvinced if this growth could extend, especially during troubled times. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts 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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