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Are Precinct Properties New Zealand Limited's (NZSE:PCT) Mixed Financials The Reason For Its Gloomy Performance on The Stock Market?

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·4 min read
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  • AOTUF

It is hard to get excited after looking at Precinct Properties New Zealand's (NZSE:PCT) recent performance, when its stock has declined 2.3% over the past three months. We, however decided to study the company's financials to determine if they have got anything to do with the price decline. Stock prices are usually driven by a company’s financial performance over the long term, and therefore we decided to pay more attention to the company's financial performance. In this article, we decided to focus on Precinct Properties New Zealand's ROE.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for Precinct Properties New Zealand

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 Precinct Properties New Zealand is:

1.6% = NZ$30m ÷ NZ$1.9b (Based on the trailing twelve months to June 2020).

The 'return' is the income the business earned over the last year. That means that for every NZ$1 worth of shareholders' equity, the company generated NZ$0.02 in profit.

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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 Precinct Properties New Zealand's Earnings Growth And 1.6% ROE

It is hard to argue that Precinct Properties New Zealand's ROE is much good in and of itself. Even when compared to the industry average of 8.4%, the ROE figure is pretty disappointing. However, the moderate 6.6% net income growth seen by Precinct Properties New Zealand over the past five years is definitely a positive. 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.

We then compared Precinct Properties New Zealand's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 10% in the same period, which is a bit concerning.

past-earnings-growth
past-earnings-growth

Earnings growth is a huge factor in stock valuation. 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. If you're wondering about Precinct Properties New Zealand's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Precinct Properties New Zealand Using Its Retained Earnings Effectively?

Precinct Properties New Zealand has a high three-year median payout ratio of 83%. This means that it has only 17% of its income left to reinvest into its business. However, it's not unusual to see a REIT with such a high payout ratio mainly due to statutory requirements. Despite this, the company's earnings grew moderately as we saw above.

Besides, Precinct Properties New Zealand has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 95% of its profits over the next three years. Still, forecasts suggest that Precinct Properties New Zealand's future ROE will rise to 4.8% even though the the company's payout ratio is not expected to change by much.

Summary

In total, we're a bit ambivalent about Precinct Properties New Zealand's performance. Although the company has shown a fair bit of growth in earnings, the reinvestment rate is low. Meaning, the earnings growth number could have been significantly higher had the company been retaining more of its profits and reinvesting that at a higher rate of return. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.