PotlatchDeltic (NASDAQ:PCH) has had a rough month with its share price down 16%. However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. In this article, we decided to focus on PotlatchDeltic's ROE.
Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Put another way, it reveals the company's success at turning shareholder investments into profits.
How To 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 PotlatchDeltic is:
1.6% = US$18m ÷ US$1.1b (Based on the trailing twelve months to June 2020).
The 'return' is the amount earned after tax over the last twelve months. Another way to think of that is that for every $1 worth of equity, the company was able to earn $0.02 in profit.
What Is The Relationship Between ROE And Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.
PotlatchDeltic's Earnings Growth And 1.6% ROE
It is hard to argue that PotlatchDeltic's ROE is much good in and of itself. Not just that, even compared to the industry average of 5.0%, the company's ROE is entirely unremarkable. PotlatchDeltic was still able to see a decent net income growth of 15% over the past five years. We believe that there might be other aspects that are positively influencing the company's earnings growth. Such as - high earnings retention or an efficient management in place.
Next, on comparing PotlatchDeltic's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 14% in the same period.
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). 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 PotlatchDeltic is trading on a high P/E or a low P/E, relative to its industry.
Is PotlatchDeltic Efficiently Re-investing Its Profits?
PotlatchDeltic seems to be paying out most of its income as dividends judging by its three-year median payout ratio of 57%, meaning the company retains only 43% of its income. However, this is typical for REITs as they are often required by law to distribute most of their earnings. Despite this, the company's earnings grew moderately as we saw above.
Additionally, PotlatchDeltic 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.
On the whole, we do feel that PotlatchDeltic has some positive attributes. That is, quite an impressive growth in earnings. However, the low profit retention means that the company's earnings growth could have been higher, had it been reinvesting a higher portion of its profits. 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.
This article by Simply Wall St is general in nature. 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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