Should Weakness in Prestige Estates Projects Limited's (NSE:PRESTIGE) Stock Be Seen As A Sign That Market Will Correct The Share Price Given Decent Financials?

Prestige Estates Projects (NSE:PRESTIGE) has had a rough month with its share price down 11%. However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. In this article, we decided to focus on Prestige Estates Projects' ROE.

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 Prestige Estates Projects

How Do You Calculate Return On Equity?

ROE 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 Prestige Estates Projects is:

5.5% = ₹9.4b ÷ ₹172b (Based on the trailing twelve months to September 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 ₹0.05.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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 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.

Prestige Estates Projects' Earnings Growth And 5.5% ROE

It is quite clear that Prestige Estates Projects' ROE is rather low. Not just that, even compared to the industry average of 7.7%, the company's ROE is entirely unremarkable. Although, we can see that Prestige Estates Projects saw a modest net income growth of 15% over the past five years. Therefore, the growth in earnings could probably have been caused by other variables. For instance, the company has a low payout ratio or is being managed efficiently.

Next, on comparing with the industry net income growth, we found that Prestige Estates Projects' reported growth was lower than the industry growth of 28% over the last few years, which is not something we like to see.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. 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 Prestige Estates Projects is trading on a high P/E or a low P/E, relative to its industry.

Is Prestige Estates Projects Efficiently Re-investing Its Profits?

In Prestige Estates Projects' case, its respectable earnings growth can probably be explained by its low three-year median payout ratio of 5.3% (or a retention ratio of 95%), which suggests that the company is investing most of its profits to grow its business.

Moreover, Prestige Estates Projects is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 5.0% of its profits over the next three years. However, Prestige Estates Projects' ROE is predicted to rise to 12% despite there being no anticipated change in its payout ratio.

Summary

In total, it does look like Prestige Estates Projects has some positive aspects to its business. That is, a decent growth in earnings backed by a high rate of reinvestment. However, we do feel that that earnings growth could have been higher if the business were to improve on the low ROE rate. Especially given how the company is reinvesting a huge chunk of its profits. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. 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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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.