Pavilion Real Estate Investment Trust's (KLSE:PAVREIT) Stock Going Strong But Fundamentals Look Weak: What Implications Could This Have On The Stock?

Pavilion Real Estate Investment Trust's (KLSE:PAVREIT) stock is up by a considerable 6.6% over the past week. However, we decided to pay close attention to its weak financials as we are doubtful that the current momentum will keep up, given the scenario. In this article, we decided to focus on Pavilion Real Estate Investment Trust's ROE.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Put another way, it reveals the company's success at turning shareholder investments into profits.

View our latest analysis for Pavilion Real Estate Investment Trust

How To Calculate Return On Equity?

The formula for ROE is:

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:

1.2% = RM46m ÷ RM3.9b (Based on the trailing twelve months to December 2020).

The 'return' is the amount earned after tax over the last twelve months. So, this means that for every MYR1 of its shareholder's investments, the company generates a profit of MYR0.01.

What Has ROE Got To Do With 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.

Pavilion Real Estate Investment Trust's Earnings Growth And 1.2% ROE

As you can see, Pavilion Real Estate Investment Trust's ROE looks pretty weak. Even when compared to the industry average of 3.1%, the ROE figure is pretty disappointing. For this reason, Pavilion Real Estate Investment Trust's five year net income decline of 10% is not surprising given its lower ROE. However, there could also be other factors causing the earnings to decline. For example, the business has allocated capital poorly, or that the company has a very high payout ratio.

With the industry earnings declining at a rate of 8.9% in the same period, we deduce that both the company and the industry are shrinking at the same rate.

Earnings growth is an important metric to consider when valuing a stock. 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. Is PAVREIT fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Pavilion Real Estate Investment Trust Making Efficient Use Of 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. Looking at the current analyst consensus data, we can see that the company's future payout ratio is expected to rise to 102% over the next three years. Regardless, the future ROE for Pavilion Real Estate Investment Trust is speculated to rise to 5.9% despite the anticipated increase in the payout ratio. There could probably be other factors that could be driving the future growth in the ROE.

Conclusion

In total, we would have a hard think before deciding on any investment action concerning Pavilion Real Estate Investment Trust. As a result of its low ROE and lack of mich reinvestment into the business, the company has seen a disappointing earnings growth rate. Having said that, looking at current analyst estimates, we found that the company's earnings growth rate is expected to see a huge improvement. 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. 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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