Yahoo Finance Is Weakness In Argosy Property Limited (NZSE:ARG) Stock A Sign That The Market Could be Wrong Given Its Strong Financial Prospects?
With its stock down 3.9% over the past month, it is easy to disregard Argosy Property (NZSE:ARG). However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. In this article, we decided to focus on Argosy Property's ROE.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
View our latest analysis for Argosy Property
How To 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 Argosy Property is:
11% = NZ$119m ÷ NZ$1.1b (Based on the trailing twelve months to September 2020).
The 'return' is the profit over the last twelve months. So, this means that for every NZ$1 of its shareholder's investments, the company generates a profit of NZ$0.11.
What Has ROE Got To Do With Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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 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.
Argosy Property's Earnings Growth And 11% ROE
At first glance, Argosy Property seems to have a decent ROE. Further, the company's ROE compares quite favorably to the industry average of 8.4%. Probably as a result of this, Argosy Property was able to see a decent growth of 15% over the last five years.
As a next step, we compared Argosy Property's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 10%.
Earnings growth is a huge factor in stock valuation. 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. Has the market priced in the future outlook for ARG? You can find out in our latest intrinsic value infographic research report.
Is Argosy Property Making Efficient Use Of Its Profits?
Argosy Property seems to be paying out most of its income as dividends judging by its three-year median payout ratio of 85%, meaning the company retains only 15% of its income. However, this is typical for REITs as they are often required by law to distribute most of their earnings. In spite of this, the company was able to grow its earnings by a fair bit, as we saw above.
Additionally, Argosy Property has paid dividends over a period of at least ten 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 86% of its profits over the next three years. However, Argosy Property's future ROE is expected to decline to 5.2% despite there being not much change anticipated in the company's payout ratio.
Summary
Overall, we are quite pleased with Argosy Property's performance. In particular, its high ROE is quite noteworthy and also the probable explanation behind its considerable earnings growth. Yet, the company is retaining a small portion of its profits. Which means that the company has been able to grow its earnings in spite of it, so that's not too bad. With that said, on studying the latest analyst forecasts, we found that while the company has seen growth in its past earnings, analysts expect its future earnings to shrink. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.
This article by Simply Wall St is general in nature. 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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