Is Pavilion Real Estate Investment Trust's (KLSE:PAVREIT) Recent Performancer Underpinned By Weak Financials?

By
Simply Wall St
Published
November 22, 2021
KLSE:PAVREIT
Source: Shutterstock

It is hard to get excited after looking at Pavilion Real Estate Investment Trust's (KLSE:PAVREIT) recent performance, when its stock has declined 6.4% over the past month. 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 Pavilion Real Estate Investment Trust's ROE today.

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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for Pavilion Real Estate Investment Trust

How Do You 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 Pavilion Real Estate Investment Trust is:

1.1% = RM41m ÷ RM3.8b (Based on the trailing twelve months to September 2021).

The 'return' is the profit over the last twelve months. Another way to think of that is that for every MYR1 worth of equity, the company was able to earn MYR0.01 in profit.

What Has ROE Got To Do With 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. 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.

Pavilion Real Estate Investment Trust's Earnings Growth And 1.1% ROE

It is hard to argue that Pavilion Real Estate Investment Trust's ROE is much good in and of itself. Even compared to the average industry ROE of 4.1%, the company's ROE is quite dismal. For this reason, Pavilion Real Estate Investment Trust's five year net income decline of 23% is not surprising given its lower ROE. We believe that there also might be other aspects that are negatively influencing the company's earnings prospects. Such as - low earnings retention or poor allocation of capital.

As a next step, we compared Pavilion Real Estate Investment Trust's performance with the industry and found thatPavilion Real Estate Investment Trust's performance is depressing even when compared with the industry, which has shrunk its earnings at a rate of 7.3% in the same period, which is a slower than the company.

past-earnings-growth
KLSE:PAVREIT Past Earnings Growth November 23rd 2021

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. Has the market priced in the future outlook for PAVREIT? You can find out in our latest intrinsic value infographic research report.

Is Pavilion Real Estate Investment Trust Using Its Retained Earnings Effectively?

Pavilion Real Estate Investment Trust seems to be paying out most of its income as dividends judging by its three-year median payout ratio of 77% (meaning, the company retains only 23% of profits). However, this is typical for REITs as they are often required by law to distribute most of their earnings. So this probably explains the company's shrinking earnings.

In addition, Pavilion Real Estate Investment Trust has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth. Our latest analyst data shows that the future payout ratio of the company is expected to rise to 117% over the next three years. However, Pavilion Real Estate Investment Trust's future ROE is expected to rise to 5.5% despite the expected increase in the company's payout ratio. We infer that there could be other factors that could be driving the anticipated growth in the company's ROE.

Conclusion

In total, we would have a hard think before deciding on any investment action concerning Pavilion Real Estate Investment Trust. The company has seen a lack of earnings growth as a result of retaining very little profits and whatever little it does retain, is being reinvested at a very low rate of return. That being so, the latest industry analyst forecasts show that the analysts are expecting to see a huge improvement in the company's earnings growth rate. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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