Declining Stock and Solid Fundamentals: Is The Market Wrong About Swiss Prime Site AG (VTX:SPSN)?

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It is hard to get excited after looking at Swiss Prime Site’s (VTX:SPSN) recent performance, when its stock has declined 4.3% over the past three months. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Particularly, we will be paying attention to Swiss Prime Site’s ROE today.

Return on equity or ROE is a key measure used to assess how efficiently a company’s management is utilizing the company’s capital. Put another way, it reveals the company’s success at turning shareholder investments into profits.

Check out our latest analysis for Swiss Prime Site

How Do You Calculate Return On Equity?

ROE can be calculated by using the formula:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity

So, based on the above formula, the ROE for Swiss Prime Site is:

8.1% = CHF523m ÷ CHF6.4b (Based on the trailing twelve months to June 2022).

The ‘return’ is the amount earned after tax over the last twelve months. That means that for every CHF1 worth of shareholders’ equity, the company generated CHF0.08 in profit.

What Is The Relationship Between ROE And 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 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.

Swiss Prime Site’s Earnings Growth And 8.1% ROE

To start with, Swiss Prime Site’s ROE looks acceptable. And on comparing with the industry, we found that the the average industry ROE is similar at 8.9%. Consequently, this likely laid the ground for the decent growth of 13% seen over the past five years by Swiss Prime Site.

We then compared Swiss Prime Site’s net income growth with the industry and found that the company’s growth figure is lower than the average industry growth rate of 20% in the same period, which is a bit concerning.

past-earnings-growth

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company’s expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Swiss Prime Site fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Swiss Prime Site Using Its Retained Earnings Effectively?

With a three-year median payout ratio of 50% (implying that the company retains 50% of its profits), it seems that Swiss Prime Site is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that’s well covered.

Additionally, Swiss Prime Site 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’s future payout ratio is expected to rise to 87% over the next three years. Accordingly, the expected increase in the payout ratio explains the expected decline in the company’s ROE to 4.7%, over the same period.

Conclusion

In total, we are pretty happy with Swiss Prime Site’s performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. As a result, the decent growth in its earnings is not surprising. 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. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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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