Stock Analysis

Are Precinct Properties New Zealand Limited's (NZSE:PCT) Mixed Financials The Reason For Its Gloomy Performance on The Stock Market?

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NZSE:PCT
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It is hard to get excited after looking at Precinct Properties New Zealand's (NZSE:PCT) recent performance, when its stock has declined 2.3% over the past month. It is possible that the markets have ignored the company's differing financials and decided to lean-in to the negative sentiment. Long-term fundamentals are usually what drive market outcomes, so it's worth paying close attention. Specifically, we decided to study Precinct Properties New Zealand's ROE in this article.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. 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 Precinct Properties New Zealand

How To Calculate Return On Equity?

The formula for return on equity is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Precinct Properties New Zealand is:

1.6% = NZ$30m ÷ NZ$1.9b (Based on the trailing twelve months to June 2020).

The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each NZ$1 of shareholders' capital it has, the company made NZ$0.02 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. 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.

Precinct Properties New Zealand's Earnings Growth And 1.6% ROE

It is hard to argue that Precinct Properties New Zealand's ROE is much good in and of itself. Even when compared to the industry average of 8.4%, the ROE figure is pretty disappointing. Precinct Properties New Zealand was still able to see a decent net income growth of 6.6% 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.

Next, on comparing with the industry net income growth, we found that Precinct Properties New Zealand's reported growth was lower than the industry growth of 10% in the same period, which is not something we like to see.

past-earnings-growth
NZSE:PCT Past Earnings Growth December 7th 2020

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. 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 Precinct Properties New Zealand is trading on a high P/E or a low P/E, relative to its industry.

Is Precinct Properties New Zealand Efficiently Re-investing Its Profits?

Precinct Properties New Zealand has a high three-year median payout ratio of 83%. This means that it has only 17% of its income left to reinvest into its business. However, it's not unusual to see a REIT with such a high payout ratio mainly due to statutory requirements. In spite of this, the company was able to grow its earnings by a fair bit, as we saw above.

Moreover, Precinct Properties New Zealand 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. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 95%. Regardless, the future ROE for Precinct Properties New Zealand is predicted to rise to 4.8% despite there being not much change expected in its payout ratio.

Summary

In total, we're a bit ambivalent about Precinct Properties New Zealand's performance. While the company has posted a decent earnings growth, We do feel that the earnings growth number could have been even higher, had the company been reinvesting more of its earnings at a higher rate of return. 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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