Prodea Real Estate Investment Company Société Anonyme's (ATH:PRODEA) Dismal Stock Performance Reflects Weak Fundamentals

With its stock down 9.3% over the past month, it is easy to disregard Prodea Real Estate Investment Company Société Anonyme (ATH:PRODEA). We decided to study the company's financials to determine if the downtrend will continue as the long-term performance of a company usually dictates market outcomes. Particularly, we will be paying attention to Prodea Real Estate Investment Company Société Anonyme's ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for Prodea Real Estate Investment Company Société Anonyme

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 Prodea Real Estate Investment Company Société Anonyme is:

4.0% = €67m ÷ €1.7b (Based on the trailing twelve months to June 2024).

The 'return' is the profit over the last twelve months. So, this means that for every €1 of its shareholder's investments, the company generates a profit of €0.04.

What Is The Relationship Between ROE And 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

A Side By Side comparison of Prodea Real Estate Investment Company Société Anonyme's Earnings Growth And 4.0% ROE

It is hard to argue that Prodea Real Estate Investment Company Société Anonyme's ROE is much good in and of itself. An industry comparison shows that the company's ROE is not much different from the industry average of 3.8% either. Therefore, it might not be wrong to say that the five year net income decline of 17% seen by Prodea Real Estate Investment Company Société Anonyme was possibly a result of the disappointing ROE.

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 6.9% over the last few years.

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. This then helps them determine if the stock is placed for a bright or bleak future. 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 Prodea Real Estate Investment Company Société Anonyme is trading on a high P/E or a low P/E, relative to its industry.

Is Prodea Real Estate Investment Company Société Anonyme Efficiently Re-investing Its Profits?

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. Its usually very hard to sustain dividend payments that are higher than reported profits. To know the 4 risks we have identified for Prodea Real Estate Investment Company Société Anonyme visit our risks dashboard for free.

Moreover, Prodea Real Estate Investment Company Société Anonyme has been paying dividends for nine years, which is a considerable amount of time, suggesting that management must have perceived that the shareholders prefer consistent dividends even though earnings have been shrinking.

Summary

On the whole, Prodea Real Estate Investment Company Société Anonyme's performance is quite a big let-down. Particularly, its ROE is a huge disappointment, not to mention its lack of proper reinvestment into the business. As a result its earnings growth has also been quite disappointing. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. To gain further insights into Prodea Real Estate Investment Company Société Anonyme's past profit growth, check out this visualization of past earnings, revenue and cash flows.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.