Are Poor Financial Prospects Dragging Down Prodea Real Estate Investment Company Société Anonyme (ATH:PRODEA Stock?

It is hard to get excited after looking at Prodea Real Estate Investment Company Société Anonyme's (ATH:PRODEA) recent performance, when its stock has declined 5.9% over the past three months. To decide if this trend could continue, we decided to look at its weak fundamentals as they shape the long-term market trends. Particularly, we will be paying attention to Prodea Real Estate Investment Company Société Anonyme's ROE today.

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 Prodea Real Estate Investment Company Société Anonyme

How To Calculate Return On Equity?

Return on equity 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 Prodea Real Estate Investment Company Société Anonyme is:

5.7% = €91m ÷ €1.6b (Based on the trailing twelve months to June 2023).

The 'return' refers to a company's earnings over the last year. That means that for every €1 worth of shareholders' equity, the company generated €0.06 in profit.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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 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 Prodea Real Estate Investment Company Société Anonyme's Earnings Growth And 5.7% ROE

At first glance, Prodea Real Estate Investment Company Société Anonyme's ROE doesn't look very promising. However, its ROE is similar to the industry average of 6.2%, so we won't completely dismiss the company. Having said that, Prodea Real Estate Investment Company Société Anonyme's five year net income decline rate was 3.0%. Bear in mind, the company does have a slightly low ROE. So that's what might be causing earnings growth to shrink.

So, as a next step, we compared Prodea Real Estate Investment Company Société Anonyme's performance against the industry and were disappointed to discover that while the company has been shrinking its earnings, the industry has been growing its earnings at a rate of 5.1% over the last few years.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. If you're wondering about Prodea Real Estate Investment Company Société Anonyme's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Prodea Real Estate Investment Company Société Anonyme Using Its Retained Earnings Effectively?

With a three-year median payout ratio as high as 135%,Prodea Real Estate Investment Company Société Anonyme's shrinking earnings don't come as a surprise as the company is paying a dividend which is beyond its means. Paying a dividend higher than reported profits is not a sustainable move. To know the 4 risks we have identified for Prodea Real Estate Investment Company Société Anonyme visit our risks dashboard for free.

In addition, Prodea Real Estate Investment Company Société Anonyme has been paying dividends over a period of eight years suggesting that keeping up dividend payments is preferred by the management even though earnings have been in decline.

Summary

Overall, we would be extremely cautious before making any decision on Prodea Real Estate Investment Company Société Anonyme. The low ROE, combined with the fact that the company is paying out almost if not all, of its profits as dividends, has resulted in the lack or absence of growth in its earnings. Up till now, we've only made a short study of the company's growth data. So it may be worth checking this free detailed graph of Prodea Real Estate Investment Company Société Anonyme's past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.