Great Portland Estates Plc (LON:GPE) on an uptrend, but the financial outlook looks quite weak: is the stock overvalued?

Great Portland Estates (LON:GPE) stock is up 6.0% over the past month. However, we wanted to take a closer look at its main financial indicators because the markets generally pay for long-term fundamentals, and in this case, they do not look very promising. In particular, we will pay attention to the ROE of Great Portland Estates today.

ROE or return on equity is a useful tool for evaluating how effectively a company can generate returns on the investment it has received from its shareholders. In other words, it is a profitability ratio that measures the rate of return on capital contributed by the company’s shareholders.

See our latest analysis for Great Portland Estates

How to calculate return on equity?

the return on equity formula East:

Return on equity = Net income (from continuing operations) ÷ Equity

So, based on the above formula, the ROE for Great Portland Estates is:

0.7% = £15m ÷ £2.0bn (based on trailing 12 months to September 2021).

The “yield” is the amount earned after tax over the last twelve months. Another way to think about this is that for every £1 of equity, the company was able to earn £0.01 of profit.

What does ROE have to do with earnings growth?

We have already established that ROE serves as an effective profit-generating indicator for a company’s future earnings. 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 all else is equal, companies that have both a higher return on equity and better earnings retention are generally the ones with a higher growth rate compared to companies that don’t. same characteristics.

Great Portland Estates earnings growth and ROE of 0.7%

It is clear that the ROE of Great Portland Estates is rather weak. Even compared to the industry average ROE of 9.7%, the company’s ROE is pretty dismal. Therefore, it may not be wrong to say that the 26% decline in net income over five years observed by Great Portland Estates was possibly the result of a lower ROE. We believe there could also be other aspects that negatively influence the company’s earnings outlook. For example, the company has misallocated capital or the company has a very high payout ratio.

That being said, we compared the performance of Great Portland Estates with the industry and became concerned when we found that while the company had cut profits, the industry had increased profits at a rate of 2.5 % over the same period.

LSE: GPE Past Earnings Growth April 2, 2022

Earnings growth is an important factor in stock valuation. It is important for an investor to know whether the market has priced in the expected growth (or decline) in the company’s earnings. This will help them determine if the future of the title looks bright or ominous. A good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings outlook. Thus, you may want to check whether Great Portland Estates is trading on a high P/E or a low P/E, relative to its industry.

Does Great Portland Estates effectively reinvest its profits?

Great Portland Estates’ very high three-year median payout ratio of 118% over the past three years suggests the company is paying its shareholders more than it earns, which explains the company’s declining earnings . It is usually very difficult to maintain dividend payments above reported earnings. You can see the 2 risks we have identified for Great Portland Estates by visiting our risk dashboard for free on our platform here.

Additionally, Great Portland Estates has paid dividends over a period of at least ten years, suggesting that maintaining dividend payments is far more important to management, even if it comes at the expense of company growth. ‘business. Existing analyst estimates suggest the company’s future payout ratio is expected to drop to 81% over the next three years. Thus, the expected decline in the distribution rate explains the expected increase in the company’s ROE to 2.5%, over the same period.

Conclusion

All in all, we would have thought carefully before deciding on any investment action regarding Great Portland Estates. More specifically, it has shown a rather unsatisfactory performance when it comes to earnings growth, and a low ROE and an equally low reinvestment rate seem to be at the root of this insufficient performance. That said, we studied the latest analyst forecasts and found that while the company has cut earnings in the past, analysts expect earnings to increase in the future. Are these analyst expectations based on general industry expectations or company fundamentals? Click here to access our analyst forecast page for the company.

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.

About Ian Crawford

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