Piedmont Office Realty Trust Inc (NYSE:PDM) Delivered A Better ROE Than The Industry, Here’s Why
I am writing today to help inform people who are new to the stock market and looking to gauge the potential return on investment in Piedmont Office Realty Trust Inc (NYSE:PDM).
With an ROE of 9.85%, Piedmont Office Realty Trust Inc (NYSE:PDM) outpaced its own industry which delivered a less exciting 7.62% over the past year. On the surface, this looks fantastic since we know that PDM has made large profits from little equity capital; however, ROE doesn’t tell us if management have borrowed heavily to make this happen. Today, we’ll take a closer look at some factors like financial leverage to see how sustainable PDM’s ROE is. Check out our latest analysis for Piedmont Office Realty Trust
Breaking down ROE — the mother of all ratios
Return on Equity (ROE) is a measure of Piedmont Office Realty Trust’s profit relative to its shareholders’ equity. An ROE of 9.85% implies $0.099 returned on every $1 invested. While a higher ROE is preferred in most cases, there are several other factors we should consider before drawing any conclusions.
Return on Equity = Net Profit ÷ Shareholders Equity
ROE is assessed against cost of equity, which is measured using the Capital Asset Pricing Model (CAPM) – but let’s not dive into the details of that today. For now, let’s just look at the cost of equity number for Piedmont Office Realty Trust, which is 8.59%. Since Piedmont Office Realty Trust’s return covers its cost in excess of 1.26%, its use of equity capital is efficient and likely to be sustainable. Simply put, Piedmont Office Realty Trust pays less for its capital than what it generates in return. ROE can be split up into three useful ratios: net profit margin, asset turnover, and financial leverage. This is called the Dupont Formula:
Dupont Formula
ROE = profit margin × asset turnover × financial leverage
ROE = (annual net profit ÷ sales) × (sales ÷ assets) × (assets ÷ shareholders’ equity)
ROE = annual net profit ÷ shareholders’ equity
The first component is profit margin, which measures how much of sales is retained after the company pays for all its expenses. The other component, asset turnover, illustrates how much revenue Piedmont Office Realty Trust can make from its asset base. Finally, financial leverage will be our main focus today. It shows how much of assets are funded by equity and can show how sustainable the company’s capital structure is. Since financial leverage can artificially inflate ROE, we need to look at how much debt Piedmont Office Realty Trust currently has. At 94.43%, Piedmont Office Realty Trust’s debt-to-equity ratio appears balanced and indicates the above-average ROE is generated from its capacity to increase profit without a large debt burden.
Next Steps:
ROE is one of many ratios which meaningfully dissects financial statements, which illustrates the quality of a company. Piedmont Office Realty Trust’s ROE is impressive relative to the industry average and also covers its cost of equity. Its high ROE is not likely to be driven by high debt. Therefore, investors may have more confidence in the sustainability of this level of returns going forward. ROE is a helpful signal, but it is definitely not sufficient on its own to make an investment decision.
For Piedmont Office Realty Trust, there are three fundamental aspects you should look at:
Financial Health: Does it have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
Valuation: What is Piedmont Office Realty Trust worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether Piedmont Office Realty Trust is currently mispriced by the market.
Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of Piedmont Office Realty Trust? Explore our interactive list of stocks with large growth potential to get an idea of what else is out there you may be missing!
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.
