It’s been nearly three months since Prologis (NYSE:PLD) lost 23% of its share price. However, a closer look at its sound financials may make you think again. Given that fundamentals typically drive long-term market results, the company is worth a look. In this article, we decided to focus on offer ROE.
ROE or return on equity is a useful tool for assessing how effectively a company can generate the return on investment it receives from its shareholders. In other words, it reveals the success of the company in converting shareholders’ investments into profits.
How do you calculate return on equity?
Return on equity can be calculated using the formula:
Return on Equity = Net Profit (From Continuing Operations) Shareholders’ Equity
So, based on the above formula, the ROE for Prologis is:
10% = US$4.0b US$39b (based on the previous twelve months to June 2022).
‘Return’ is the income that the business has earned in the previous year. This means that for every $1 worth of shareholders’ equity, the company generated $0.10 in profit.
What does ROE have to do with earnings growth?
So far, we’ve learned that ROE measures how efficiently a company is generating its profits. Now we need to evaluate how much profit the company reinvests or “retains” for future growth which gives us an idea about the growth potential of the company. Generally, other things being equal, firms with higher returns on equity and profit retention have higher growth rates than firms that do not share these characteristics.
Comparison of Prologis’ earnings growth and 10% ROE side-by-side
At first glance, Prologis seems to have a decent ROE. In addition, the company’s ROE is well below the industry average of 6.5%. That probably laid the groundwork for Prologis’ moderate 14% net income growth over the past five years.
Next, when compared with the industry’s net income growth, we found Prologis’ growth to be significantly higher compared to the industry average growth of 11% over the same period, which is great to see.
Earnings growth is an important metric when valuing a stock. The investor should attempt to establish whether the expected growth or decline in earnings, as the case may be, has been priced. This helps them determine whether the stock is poised for a bright or bleak future. What is the value of PLD today? Intrinsic Value Infographic in our free research report It helps to visualize if the PLD is currently undervalued by the market.
Is Prologis making efficient use of its profits?
Prologis has a three-year average payout ratio of 52%. This means that he has only 48% of his income left to reinvest in his business. However, it is not uncommon to see REITs with such high payout ratios, mainly due to statutory requirements. Despite this, as we saw above, the company’s earnings grew marginally.
Additionally, Prologis has paid dividends over a period of at least ten years which means that the company is fairly serious about sharing its profits with shareholders. Based on the latest analyst estimates, we find that the Company’s future payout ratio is expected to remain stable at 56% over the next three years. Still, forecasts suggest that ProLogis’ future ROE will drop to 7.4%, although the company’s payout ratio isn’t expected to change much.
Overall, we think Prologis has performed well. We are particularly impressed by the significant increase in earnings the company posted, which was likely to be supported by its higher ROE. While the company is paying out most of its earnings in the form of dividends, it has still been able to increase its earnings, so that’s probably a good sign. Should this happen, the company’s earnings are expected to decline in the future, according to the latest industry analyst forecasts. Are these analysts’ expectations based on broader expectations for the industry, or based on company fundamentals? Click here to visit our analyst’s forecast page for the company.
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This article by Simple Wall St. is general in nature. We only provide commentary based on historical data and analyst forecasts using an unbiased methodology and our articles are not intended to be financial advice. It does not recommend buying or selling any stock, and does not take into account your objectives, or your financial situation. We aim to bring you long-term focused analytics powered by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative content. Simple Wall St does not have a position in any of the stocks mentioned.
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