Is Piedmont Office Realty Trust, Inc.'s (NYSE:PDM) Stock Price Struggling As A Result Of Its Mixed Financials?
With its stock down 15% over the past three months, it is easy to disregard Piedmont Office Realty Trust (NYSE:PDM). 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. In this article, we decided to focus on Piedmont Office Realty Trust's ROE.
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.
See our latest analysis for Piedmont Office Realty Trust
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 Piedmont Office Realty Trust is:
2.7% = US$49m ÷ US$1.8b (Based on the trailing twelve months to March 2022).
The 'return' is the income the business earned over the last year. That means that for every $1 worth of shareholders' equity, the company generated $0.03 in profit.
Why Is ROE Important For Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. 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 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.
A Side By Side comparison of Piedmont Office Realty Trust's Earnings Growth And 2.7% ROE
It is quite clear that Piedmont Office Realty Trust's ROE is rather low. Even compared to the average industry ROE of 6.5%, the company's ROE is quite dismal. Hence, the flat earnings seen by Piedmont Office Realty Trust over the past five years could probably be the result of it having a lower ROE.
As a next step, we compared Piedmont Office Realty Trust's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 11% in the same period.
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. This then helps them determine if the stock is placed for a bright or bleak future. 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 Piedmont Office Realty Trust is trading on a high P/E or a low P/E, relative to its industry.
Is Piedmont Office Realty Trust Making Efficient Use Of Its Profits?
Despite having a normal three-year median payout ratio of 46% (implying that the company keeps 54% of its income) over the last three years, Piedmont Office Realty Trust has seen a negligible amount of growth in earnings as we saw above. Therefore, there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.
Additionally, Piedmont Office Realty Trust 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 is expected to keep paying out approximately 44% of its profits over the next three years. Therefore, the company's future ROE is also not expected to change by much with analysts predicting an ROE of 2.9%.
Conclusion
In total, we're a bit ambivalent about Piedmont Office Realty Trust's performance. While the company does have a high rate of profit retention, its low rate of return is probably hampering its earnings growth. That being so, according to the latest industry analyst forecasts, the company's earnings are expected to shrink in the future. 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.
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.
