Declining Stock and Decent Financials: Is The Market Wrong About Swiss Prime Site AG (VTX:SPSN)?

With its stock down 1.9% over the past week, it is easy to disregard Swiss Prime Site (VTX:SPSN). However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. Particularly, we will be paying attention to Swiss Prime Site'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. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for Swiss Prime Site

How To Calculate Return On Equity?

The formula for return on equity is:

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

So, based on the above formula, the ROE for Swiss Prime Site is:

9.1% = CHF522m ÷ CHF5.7b (Based on the trailing twelve months to June 2020).

The 'return' is the income the business earned over the last year. So, this means that for every CHF1 of its shareholder's investments, the company generates a profit of CHF0.09.

What Has ROE Got To Do With Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.

Swiss Prime Site's Earnings Growth And 9.1% ROE

To start with, Swiss Prime Site's ROE looks acceptable. Especially when compared to the industry average of 7.2% the company's ROE looks pretty impressive. This certainly adds some context to Swiss Prime Site's decent 12% net income growth seen over the past five years.

We then compared Swiss Prime Site's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 20% in the same period, which is a bit concerning.

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. 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 Swiss Prime Site is trading on a high P/E or a low P/E, relative to its industry.

Is Swiss Prime Site Making Efficient Use Of Its Profits?

The high three-year median payout ratio of 86% (or a retention ratio of 14%) for Swiss Prime Site suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.

Moreover, Swiss Prime Site 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. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 97%. Regardless, Swiss Prime Site's ROE is speculated to decline to 4.6% despite there being no anticipated change in its payout ratio.

Summary

In total, it does look like Swiss Prime Site has some positive aspects to its business. Its earnings have grown respectably as we saw earlier, which was likely due to the company reinvesting its earnings at a pretty high rate of return. However, given the high ROE, we do think that the company is reinvesting a small portion of its profits. This could likely be preventing the company from growing to its full extent. With that said, on studying the latest analyst forecasts, we found that while the company has seen growth in its past earnings, analysts expect its future earnings to shrink. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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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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