Is the latest stock market performance of Prestige Estates Projects Limited (NSE: PRESTIGE) a reflection of its financial health?
Prestige Estates Projects (NSE: PRESTIGE) had a strong run in the equity market with its share up significantly by 68% over the past three months. Since the market typically pays for a company’s long-term fundamentals, we decided to study the company’s KPIs to see if they could influence the market. In this article, we have decided to focus on the ROE of Prestige Estates Projects.
Return on equity or ROE is an important factor for a shareholder to consider because it tells them how efficiently their capital is being reinvested. In other words, it reveals the company’s success in turning shareholders’ investments into profits.
See our latest analysis for Prestige Estates projects
How is the ROE calculated?
The return on equity formula is:
Return on equity = Net income (from continuing operations) Ã· Equity
Thus, on the basis of the above formula, the ROE of prestige real estate projects is:
23% = â¹ 16b Ã· â¹ 71b (Based on the last twelve months up to June 2021).
The “return” is the profit of the last twelve months. One way to conceptualize this is that for every 1 of share capital it has, the company has made 0.23 of profit.
What does ROE have to do with profit growth?
We have already established that ROE is an effective indicator of profit generation for a company’s future profits. Based on the portion of its profits that the company chooses to reinvest or âkeepâ, we are then able to assess a company’s future ability to generate profits. Assuming everything else remains the same, the higher the ROE and profit retention, the higher the growth rate of a business compared to businesses that don’t necessarily have these characteristics.
Prestige Estates Projects profit growth and 23% ROE
At first glance, Prestige Estates Projects appears to have a decent ROE. Compared to the industry’s average ROE of 4.1%, the company’s ROE looks quite remarkable. It is probably because of this that Prestige Estates Projects has achieved an impressive growth in net income of 31% over the past five years. We believe that there could also be other aspects that positively influence the company’s profit growth. For example, it is possible that the management of the company has made good strategic decisions or that the company has a low payout ratio.
In the next step, we compared the net income growth of Prestige Estates Projects with the industry and luckily we found that the growth observed by the company is higher than the industry average growth of 5.2 %.
Profit growth is an important metric to consider when valuing a stock. What investors next need to determine is whether the expected earnings growth, or lack thereof, is already built into the share price. This will help them determine whether the future of the stock looks bright or threatening. If you are wondering about the valuation of Prestige Estates Projects, check out this gauge of its price / earnings ratio, relative to its industry.
Does Prestige Estates Projects effectively reinvest its profits?
Prestige Estates Projects’ three-year median payout ratio is less than 4.1%, implying that it retains a higher percentage (96%) of its profits. So it seems that management is reinvesting the profits massively to grow their business, which is reflected in the profit growth figure.
In addition, Prestige Estates Projects is determined to continue to share its profits with shareholders whom we derive from its long history of paying dividends for at least ten years. Looking at the current analyst consensus data, we can see that the company’s future payout ratio is expected to increase to 9.6% over the next three years. Thus, the expected increase in the payout ratio explains the expected drop in the company’s ROE to 9.7% over the same period.
Overall, we are quite happy with the performance of Prestige Estates Projects. In particular, we like the fact that the company is reinvesting heavily in its business and at a high rate of return. Unsurprisingly, this has led to impressive profit growth. That said, studying the latest analysts’ forecast, we found that while the company has seen past earnings growth, analysts expect future earnings to decline. To learn more about the company’s future earnings growth forecast, take a look at this free analyst forecast report for the company to learn more.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative material. Simply Wall St has no position in the mentioned stocks.
Do you have any feedback on this item? Are you worried about the content? Get in touch with us directly. You can also send an email to the editorial team (at) simplywallst.com.
When trading Prestige Estates projects or any other investment, use the platform considered by many to be the gateway for professionals to the global market, Interactive Brokers. You get the cheapest * trading on stocks, options, futures, forex, bonds and funds from around the world from a single integrated account.Promoted