Yahoo Finance Piedmont Office Realty Trust, Inc.'s (NYSE:PDM) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?
With its stock down 7.2% over the past three months, it is easy to disregard Piedmont Office Realty Trust (NYSE:PDM). However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. Particularly, we will be paying attention to Piedmont Office Realty Trust's ROE today.
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. Put another way, it reveals the company's success at turning shareholder investments into profits.
View our latest analysis for Piedmont Office Realty Trust
How Do You Calculate Return On Equity?
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 Piedmont Office Realty Trust is:
2.7% = US$51m ÷ US$1.9b (Based on the trailing twelve months to June 2021).
The 'return' is the profit over the last twelve months. One way to conceptualize this is that for each $1 of shareholders' capital it has, the company made $0.03 in profit.
Why Is ROE Important For Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. 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.
Piedmont Office Realty Trust's Earnings Growth And 2.7% ROE
It is hard to argue that Piedmont Office Realty Trust's ROE is much good in and of itself. Not just that, even compared to the industry average of 5.5%, the company's ROE is entirely unremarkable. However, the moderate 14% net income growth seen by Piedmont Office Realty Trust over the past five years is definitely a positive. Therefore, the growth in earnings could probably have been caused by other variables. Such as - high earnings retention or an efficient management in place.
Next, on comparing with the industry net income growth, we found that Piedmont Office Realty Trust's growth is quite high when compared to the industry average growth of 8.8% in the same period, which is great to see.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. Is PDM fairly valued? This infographic on the company's intrinsic value has everything you need to know.
Is Piedmont Office Realty Trust Efficiently Re-investing Its Profits?
Piedmont Office Realty Trust has a healthy combination of a moderate three-year median payout ratio of 48% (or a retention ratio of 52%) and a respectable amount of growth in earnings as we saw above, meaning that the company has been making efficient use of its profits.
Moreover, Piedmont Office Realty Trust is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 43%. However, Piedmont Office Realty Trust's ROE is predicted to rise to 3.6% despite there being no anticipated change in its payout ratio.
Conclusion
In total, it does look like Piedmont Office Realty Trust has some positive aspects to its business. With a high rate of reinvestment, albeit at a low ROE, the company has managed to see a considerable growth in its earnings. On studying current analyst estimates, we found that analysts expect the company to continue its recent growth streak. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.
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.
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