Yahoo Finance PSP Swiss Property AG (VTX:PSPN) Is Up But Financials Look Inconsistent: Which Way Is The Stock Headed?
Most readers would already know that PSP Swiss Property's (VTX:PSPN) stock increased by 5.0% over the past three months. However, the company's financials look a bit inconsistent and market outcomes are ultimately driven by long-term fundamentals, meaning that the stock could head in either direction. Specifically, we decided to study PSP Swiss Property's ROE in this article.
Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. Put another way, it reveals the company's success at turning shareholder investments into profits.
View our latest analysis for PSP Swiss Property
How Do You 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 PSP Swiss Property is:
4.4% = CHF232m ÷ CHF5.3b (Based on the trailing twelve months to March 2024).
The 'return' is the income the business earned over the last year. Another way to think of that is that for every CHF1 worth of equity, the company was able to earn CHF0.04 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. 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. 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.
PSP Swiss Property's Earnings Growth And 4.4% ROE
At first glance, PSP Swiss Property's ROE doesn't look very promising. Although a closer study shows that the company's ROE is higher than the industry average of 2.5% which we definitely can't overlook. However, PSP Swiss Property's five year net income decline rate was 7.6%. Bear in mind, the company does have a slightly low ROE. It is just that the industry ROE is lower. Therefore, the decline in earnings could also be the result of this.
From the 7.0% decline reported by the industry in the same period, we infer that PSP Swiss Property and its industry are both shrinking at a similar rate.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). 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 Making Efficient Use Of Its Profits?
With a high three-year median payout ratio of 50% (implying that 50% of the profits are retained), most of PSP Swiss Property's profits are being paid to shareholders, which explains the company's shrinking earnings. The business is only left with a small pool of capital to reinvest - A vicious cycle that doesn't benefit the company in the long-run. To know the 3 risks we have identified for PSP Swiss Property visit our risks dashboard for free.
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. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to rise to 76% over the next three years. Despite the higher expected payout ratio, the company's ROE is not expected to change by much.
Conclusion
Overall, we have mixed feelings about PSP Swiss Property. Specifically, the low earnings growth is a bit concerning, especially given that the company has a respectable rate of return. Investors may have benefitted, had the company been reinvesting more of its earnings. As discussed earlier, the company is retaining a small portion of its profits. Having said that, looking at current analyst estimates, we found that the company's earnings growth rate is expected to see a huge improvement. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.
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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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com
