June 19, 2024
Finance

Could It Mean A Stock Price Drop In The Future?


Most readers would already know that PSP Swiss Property’s (VTX:PSPN) stock increased by 3.6% over the past three months. However, in this article, we decided to focus on its weak financials, as long-term fundamentals ultimately dictate market outcomes. In this article, we decided to focus on PSP Swiss Property’s ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Put another way, it reveals the company’s success at turning shareholder investments into profits.

View our latest analysis for PSP Swiss Property

How Is ROE Calculated?

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 PSP Swiss Property is:

3.9% = CHF201m ÷ CHF5.2b (Based on the trailing twelve months to September 2023).

The ‘return’ is the yearly profit. One way to conceptualize this is that for each CHF1 of shareholders’ capital it has, the company made CHF0.04 in profit.

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company’s future earnings. Depending on how much of these profits the company reinvests or “retains”, and how effectively it does so, we are then able to assess a company’s earnings growth potential. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don’t have the same features.

PSP Swiss Property’s Earnings Growth And 3.9% ROE

When you first look at it, PSP Swiss Property’s ROE doesn’t look that attractive. However, its ROE is similar to the industry average of 3.5%, so we won’t completely dismiss the company. Still, PSP Swiss Property has seen a flat net income growth over the past five years. Remember, the company’s ROE is not particularly great to begin with. So that could also be one of the reasons behind the company’s flat growth in earnings.

As a next step, we compared PSP Swiss Property’s net income growth with the industry and discovered that the industry saw an average growth of 8.3% in the same period.

past-earnings-growth

past-earnings-growth

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock’s future looks promising or ominous. Is PSP Swiss Property fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is PSP Swiss Property Using Its Retained Earnings Effectively?

PSP Swiss Property has a high three-year median payout ratio of 50% (or a retention ratio of 50%), meaning that the company is paying most of its profits as dividends to its shareholders. This does go some way in explaining why there’s been no growth in its earnings.

Additionally, PSP Swiss Property has paid dividends over a period of at least ten years, which means that the company’s management is determined to pay dividends even if it means little to no earnings growth. Our latest analyst data shows that the future payout ratio of the company is expected to rise to 75% over the next three years. Regardless, the future ROE for PSP Swiss Property is speculated to rise to 4.8% despite the anticipated increase in the payout ratio. There could probably be other factors that could be driving the future growth in the ROE.

Summary

In total, we would have a hard think before deciding on any investment action concerning PSP Swiss Property. As a result of its low ROE and lack of much reinvestment into the business, the company has seen a disappointing earnings growth rate. 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 company’s future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.



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