Declining Stock and Solid Fundamentals: Is The Market Wrong About The Property Franchise Group PLC (LON:TPFG)?

By
Simply Wall St
Published
November 22, 2021
AIM:TPFG
Source: Shutterstock

Property Franchise Group (LON:TPFG) has had a rough three months with its share price down 19%. But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. Particularly, we will be paying attention to Property Franchise Group's ROE today.

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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

Check out our latest analysis for Property Franchise Group

How Is ROE Calculated?

The formula for ROE is:

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

So, based on the above formula, the ROE for Property Franchise Group is:

14% = UK£4.5m ÷ UK£33m (Based on the trailing twelve months to June 2021).

The 'return' is the amount earned after tax over the last twelve months. So, this means that for every £1 of its shareholder's investments, the company generates a profit of £0.14.

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. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.

Property Franchise Group's Earnings Growth And 14% ROE

At first glance, Property Franchise Group seems to have a decent ROE. Further, the company's ROE compares quite favorably to the industry average of 10.0%. Probably as a result of this, Property Franchise Group was able to see a decent growth of 5.2% over the last five years.

Next, on comparing with the industry net income growth, we found that the growth figure reported by Property Franchise Group compares quite favourably to the industry average, which shows a decline of 3.6% in the same period.

past-earnings-growth
AIM:TPFG Past Earnings Growth November 23rd 2021

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Property Franchise Group's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Property Franchise Group Efficiently Re-investing Its Profits?

Property Franchise Group has a significant three-year median payout ratio of 61%, meaning that it is left with only 39% 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, Property Franchise Group has paid dividends over a period of seven years which means that the company is pretty serious about sharing its profits with shareholders.

Summary

In total, we are pretty happy with Property Franchise Group's performance. Especially the high ROE, Which has contributed to the impressive growth seen in earnings. Despite the company reinvesting only a small portion of its profits, it still has managed to grow its earnings so that is appreciable. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. 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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