Declining Stock and Decent Financials: Is The Market Wrong About Propel Funeral Partners Limited (ASX:PFP)?

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editorial-team@simplywallst.com (Simply Wall St)

Sun, Nov 24, 2024, 8:43 PM 4 min read

It is hard to get excited after looking at Propel Funeral Partners' (ASX:PFP) recent performance, when its stock has declined 4.2% over the past month. 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 Propel Funeral Partners' ROE.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for Propel Funeral Partners

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 Propel Funeral Partners is:

5.1% = AU$18m ÷ AU$352m (Based on the trailing twelve months to June 2024).

The 'return' refers to a company's earnings over the last year. So, this means that for every A$1 of its shareholder's investments, the company generates a profit of A$0.05.

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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 everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

Propel Funeral Partners' Earnings Growth And 5.1% ROE

When you first look at it, Propel Funeral Partners' ROE doesn't look that attractive. However, its ROE is similar to the industry average of 5.6%, so we won't completely dismiss the company. Having said that, Propel Funeral Partners has shown a modest net income growth of 12% over the past five years. Considering the moderately low ROE, it is quite possible that there might be some other aspects that are positively influencing the company's earnings growth. For instance, the company has a low payout ratio or is being managed efficiently.

Next, on comparing Propel Funeral Partners' net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 12% over the last few years.

past-earnings-growth — ASX:PFP Past Earnings Growth November 25th 2024

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. What is PFP worth today? The intrinsic value infographic in our free research report helps visualize whether PFP is currently mispriced by the market.

Is Propel Funeral Partners Efficiently Re-investing Its Profits?

While Propel Funeral Partners has a three-year median payout ratio of 87% (which means it retains 13% of profits), the company has still seen a fair bit of earnings growth in the past, meaning that its high payout ratio hasn't hampered its ability to grow.

Additionally, Propel Funeral Partners has paid dividends over a period of six years which means that the company is pretty serious about sharing its profits with shareholders. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 79% of its profits over the next three years. However, Propel Funeral Partners' ROE is predicted to rise to 8.7% despite there being no anticipated change in its payout ratio.

Conclusion

Overall, we feel that Propel Funeral Partners certainly does have some positive factors to consider. While no doubt its earnings growth is pretty substantial, we do feel that the reinvestment rate is pretty low, meaning, the earnings growth number could have been significantly higher had the company been retaining more of its profits. The latest industry analyst forecasts show that the company is expected to maintain its current growth rate. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.