Can Mixed Financials Have A Negative Impact on Polygon Real Estate Ltd's 's (TLV:POLY) Current Price Momentum?

Polygon Real Estate's (TLV:POLY) stock is up by 5.0% over the past three months. However, the company's financials look a bit inconsistent and market outcomes are ultimately driven by long-term fundamentals, meaning that the stock could head in either direction. Specifically, we decided to study Polygon Real Estate's ROE in this article.

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.

Check out our latest analysis for Polygon Real Estate

How Is ROE Calculated?

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 Polygon Real Estate is:

7.7% = ₪8.3m ÷ ₪109m (Based on the trailing twelve months to June 2020).

The 'return' is the yearly profit. Another way to think of that is that for every ₪1 worth of equity, the company was able to earn ₪0.08 in profit.

Why Is ROE Important For 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.

Polygon Real Estate's Earnings Growth And 7.7% ROE

On the face of it, Polygon Real Estate's ROE is not much to talk about. A quick further study shows that the company's ROE doesn't compare favorably to the industry average of 9.9% either. Therefore, it might not be wrong to say that the five year net income decline of 6.2% seen by Polygon Real Estate was probably the result of it having a lower ROE. However, there could also be other factors causing the earnings to decline. For instance, the company has a very high payout ratio, or is faced with competitive pressures.

That being said, we compared Polygon Real Estate's performance with the industry and were concerned when we found that while the company has shrunk its earnings, the industry has grown its earnings at a rate of 11% in the same period.

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. 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 Polygon Real Estate is trading on a high P/E or a low P/E, relative to its industry.

Is Polygon Real Estate Efficiently Re-investing Its Profits?

Conclusion

Overall, we have mixed feelings about Polygon Real Estate. While the company does have a high rate of profit retention, its low rate of return is probably hampering its earnings growth. Wrapping up, we would proceed with caution with this company and one way of doing that would be to look at the risk profile of the business. You can see the 2 risks we have identified for Polygon Real Estate by visiting our risks dashboard for free on our platform here.

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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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