Pavilion Real Estate Investment Trust's (KLSE:PAVREIT) Has Been On A Rise But Financial Prospects Look Weak: Is The Stock Overpriced?

Most readers would already be aware that Pavilion Real Estate Investment Trust's (KLSE:PAVREIT) stock increased significantly by 7.2% over the past month. We, however wanted to have a closer look at its key financial indicators as the markets usually pay for long-term fundamentals, and in this case, they don't look very promising. Specifically, we decided to study Pavilion Real Estate Investment Trust's ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. 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 To 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:

3.9% = RM151m ÷ RM3.9b (Based on the trailing twelve months to September 2020).

The 'return' is the yearly profit. That means that for every MYR1 worth of shareholders' equity, the company generated MYR0.04 in profit.

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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. 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 3.9% ROE

As you can see, Pavilion Real Estate Investment Trust's ROE looks pretty weak. Further, we noted that the company's ROE is similar to the industry average of 3.9%. Given the circumstances, the significant decline in net income by 10.0% seen by Pavilion Real Estate Investment Trust over the last five years is not surprising.

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 7.2% in the same period, which is a slower than the company.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. 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 Efficiently Re-investing Its Profits?

Pavilion Real Estate Investment Trust has a very high three-year median payout ratio of 82%, implying that it retains only 18% of its profits. However, it's not unusual to see a REIT with such a high payout ratio mainly due to statutory requirements. Accordingly, this likely explains why its earnings have been shrinking.

Additionally, Pavilion Real Estate Investment Trust has paid dividends over a period of nine years, which means that the company's management is rather focused on keeping up its dividend payments, regardless of the shrinking earnings. Our latest analyst data shows that the future payout ratio of the company is expected to rise to 101% 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.

Summary

Overall, we would be extremely cautious before making any decision on 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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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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