With its stock down 11% over the past month, it’s easy to overlook Prestige Estates Projects (NSE: PRESTIGE). But if you pay close attention, you might realize that its strong financials could mean the stock could potentially see a long-term rise in value, as the markets generally reward companies in good financial shape. In this article, we have decided to focus on the ROE of Prestige Estates Projects.
Return on equity or ROE is a key metric used to gauge how effectively a company’s management is using the company’s capital. In simple terms, it is used to assess the profitability of a company in relation to its equity.
See our latest analysis for Prestige Estates projects
How is ROE calculated?
the ROE formula is:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE for Prestige Estates projects is:
23% = ₹16 billion ÷ ₹72 billion (based on the last twelve months to December 2021).
The “yield” is the amount earned after tax over the last twelve months. One way to conceptualize this is that for every ₹1 of share capital it has, the company has made a profit of ₹0.23.
Why is ROE important for earnings growth?
So far, we have learned that ROE measures how efficiently a company generates its profits. Depending on how much of its profits the company chooses to reinvest or “keep”, we are then able to assess a company’s future ability to generate profits. Assuming everything else remains unchanged, the higher the ROE and earnings retention, the higher a company’s growth rate compared to companies that don’t necessarily exhibit these characteristics.
Prestige Estates Projects profit growth and 23% ROE
At first glance, Prestige Estates Projects appears to have a decent ROE. Additionally, the company’s ROE compares quite favorably to the industry average of 4.1%. This likely laid the foundation for Prestige Estates Projects’ significant 39% net income growth over the past five years. However, there could also be other causes behind this 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 a next step, we compared Prestige Estates Projects’ net income growth with the industry, and fortunately, we found that the growth the company saw was above the industry average growth of 6.0. %.
Earnings growth is an important metric to consider when evaluating a stock. The investor should try to establish whether the expected growth or decline in earnings, as the case may be, is taken into account. This will help him determine if the future of the stock looks bright or ominous. If you’re wondering about Prestige Estates Projects’ valuation, check out this indicator of its price-earnings ratio, relative to its industry.
Does Prestige Estates Projects use its profits effectively?
Prestige Estates Projects’ three-year median payout ratio is below 4.1%, meaning it retains a higher percentage (96%) of its earnings. This suggests that management reinvests most of the profits to grow the business, as evidenced by the growth seen by the business.
Additionally, Prestige Estates Projects has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. After reviewing the latest analyst consensus data, we found that the company’s future payout ratio is expected to reach 8.8% over the next three years. Thus, the expected increase in the payout ratio explains the expected drop in the company’s ROE to 10%, over the same period.
Overall, we believe the performance of Prestige Estates Projects has been quite good. In particular, it is good to see that the company is investing heavily in its business, and together with a high rate of return, this has led to significant growth in its profits. That said, a study of the latest analyst forecasts shows that the company should see a slowdown in future earnings growth. For more on the company’s future earnings growth forecast, check out this free analyst forecast report for the company to learn more.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.