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Most readers would already know that PSP Swiss Property's (VTX:PSPN) stock increased by 3.6% over the past three months. However, in this article, we decided to focus on its weak financials, as long-term fundamentals ultimately dictate market outcomes. In this article, we decided to focus on PSP Swiss Property's ROE.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Put another way, it reveals the company's success at turning shareholder investments into profits.
View our latest analysis for PSP Swiss Property
How Is ROE Calculated?
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 PSP Swiss Property is:
3.9% = CHF201m ÷ CHF5.2b (Based on the trailing twelve months to September 2023).
The 'return' is the yearly profit. One way to conceptualize this is that for each CHF1 of shareholders' capital it has, the company made CHF0.04 in profit.
Why Is ROE Important For Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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.
PSP Swiss Property's Earnings Growth And 3.9% ROE
When you first look at it, PSP Swiss Property's ROE doesn't look that attractive. However, its ROE is similar to the industry average of 3.5%, so we won't completely dismiss the company. Still, PSP Swiss Property has seen a flat net income growth over the past five years. Remember, the company's ROE is not particularly great to begin with. So that could also be one of the reasons behind the company's flat growth in earnings.
As a next step, we compared PSP Swiss Property's net income growth with the industry and discovered that the industry saw an average growth of 8.3% in the same period.
Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. Is PSP Swiss Property fairly valued compared to other companies? These 3 valuation measures might help you decide.