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 three months with its share price down 34%. 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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for Prestige Estates Projects

How Is ROE Calculated?

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:

4.7% = ₹8.1b ÷ ₹172b (Based on the trailing twelve months to December 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.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.

Prestige Estates Projects' Earnings Growth And 4.7% ROE

It is hard to argue that Prestige Estates Projects' ROE is much good in and of itself. Not just that, even compared to the industry average of 6.4%, the company's ROE is entirely unremarkable. Although, we can see that Prestige Estates Projects saw a modest net income growth of 9.1% over the past five years. Therefore, the growth in earnings could probably have been caused by other variables. Such as - high earnings retention or an efficient management in place.

We then compared Prestige Estates Projects' net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 31% in the same 5-year period, which is a bit concerning.

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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about Prestige Estates Projects''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Prestige Estates Projects Using Its Retained Earnings Effectively?

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.

Additionally, Prestige Estates Projects has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 5.1% of its profits over the next three years. However, Prestige Estates Projects' ROE is predicted to rise to 10.0% despite there being no anticipated change in its payout ratio.

Summary

On the whole, we do feel that Prestige Estates Projects has some positive attributes. 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. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. 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.