Yahoo Finance Could The Market Be Wrong About Packaging Corporation of America (NYSE:PKG) Given Its Attractive Financial Prospects?
It is hard to get excited after looking at Packaging Corporation of America's (NYSE:PKG) recent performance, when its stock has declined 9.1% over the past month. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Specifically, we decided to study Packaging Corporation of America'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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
See our latest analysis for Packaging Corporation of America
How To Calculate Return On Equity?
ROE 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 Packaging Corporation of America is:
26% = US$966m ÷ US$3.8b (Based on the trailing twelve months to March 2023).
The 'return' is the profit over the last twelve months. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.26.
Why Is ROE Important For Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. 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.
Packaging Corporation of America's Earnings Growth And 26% ROE
First thing first, we like that Packaging Corporation of America has an impressive ROE. Further, even comparing with the industry average if 21%, the company's ROE is quite respectable. Therefore, it looks like the high ROE is what probably supported Packaging Corporation of America's modest 6.7% growth over the past five years.
Next, on comparing with the industry net income growth, we found that Packaging Corporation of America's reported growth was lower than the industry growth of 12% in the same period, which is not something we like to see.
Earnings growth is an important metric to consider when valuing a stock. 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. What is PKG worth today? The intrinsic value infographic in our free research report helps visualize whether PKG is currently mispriced by the market.
Is Packaging Corporation of America Efficiently Re-investing Its Profits?
Packaging Corporation of America has a healthy combination of a moderate three-year median payout ratio of 48% (or a retention ratio of 52%) and a respectable amount of growth in earnings as we saw above, meaning that the company has been making efficient use of its profits.
Additionally, Packaging Corporation of America has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. 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 53%. Regardless, Packaging Corporation of America's ROE is speculated to decline to 18% despite there being no anticipated change in its payout ratio.
Conclusion
Overall, we are quite pleased with Packaging Corporation of America's performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. As a result, the decent growth in its earnings is not surprising. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. 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. 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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