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

By
Simply Wall St
Published
December 22, 2021
SWX:SPSN
Source: Shutterstock

Swiss Prime Site (VTX:SPSN) has had a rough month with its share price down 6.5%. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Specifically, we decided to study Swiss Prime Site's ROE in this article.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

See our latest analysis for Swiss Prime Site

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 Swiss Prime Site is:

9.8% = CHF598m ÷ CHF6.1b (Based on the trailing twelve months to June 2021).

The 'return' is the profit over the last twelve months. So, this means that for every CHF1 of its shareholder's investments, the company generates a profit of CHF0.10.

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 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.

Swiss Prime Site's Earnings Growth And 9.8% ROE

At first glance, Swiss Prime Site seems to have a decent ROE. Further, the company's ROE is similar to the industry average of 9.9%. This certainly adds some context to Swiss Prime Site's moderate 18% net income growth seen over the past five years.

We then performed a comparison between Swiss Prime Site's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 21% in the same period.

past-earnings-growth
SWX:SPSN Past Earnings Growth December 22nd 2021

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 Using Its Retained Earnings Effectively?

Swiss Prime Site has a significant three-year median payout ratio of 51%, meaning that it is left with only 49% to reinvest into its business. This implies that the company has been able to achieve decent earnings growth despite returning most of its profits to shareholders.

Additionally, Swiss Prime Site has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Looking at the current analyst consensus data, we can see that the company's future payout ratio is expected to rise to 96% over the next three years. Consequently, the higher expected payout ratio explains the decline in the company's expected ROE (to 5.1%) over the same period.

Conclusion

Overall, we are quite pleased with Swiss Prime Site's performance. In particular, its high ROE is quite noteworthy and also the probable explanation behind its considerable earnings growth. Yet, the company is retaining a small portion of its profits. Which means that the company has been able to grow its earnings in spite of it, so that's not too bad. Having said that, on studying current analyst estimates, we were concerned to see that while the company has grown its earnings in the past, analysts expect its earnings to shrink in the future. 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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