UK markets close in 5 hours 22 minutes
  • FTSE 100

    7,528.53
    +63.73 (+0.85%)
     
  • FTSE 250

    20,142.96
    +218.85 (+1.10%)
     
  • AIM

    962.25
    +6.67 (+0.70%)
     
  • GBP/EUR

    1.1888
    +0.0086 (+0.73%)
     
  • GBP/USD

    1.2457
    +0.0133 (+1.08%)
     
  • BTC-GBP

    24,544.53
    +631.60 (+2.64%)
     
  • CMC Crypto 200

    686.53
    +443.85 (+182.89%)
     
  • S&P 500

    4,008.01
    -15.88 (-0.39%)
     
  • DOW

    32,223.42
    +26.76 (+0.08%)
     
  • CRUDE OIL

    114.92
    +0.72 (+0.63%)
     
  • GOLD FUTURES

    1,826.90
    +12.90 (+0.71%)
     
  • NIKKEI 225

    26,659.75
    +112.70 (+0.42%)
     
  • HANG SENG

    20,602.52
    +652.31 (+3.27%)
     
  • DAX

    14,185.68
    +221.30 (+1.58%)
     
  • CAC 40

    6,439.96
    +92.19 (+1.45%)
     

Is PS Business Parks, Inc.'s(NYSE:PSB) Recent Stock Performance Tethered To Its Strong Fundamentals?

  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.
·4-min read
In this article:
  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.

PS Business Parks (NYSE:PSB) has had a great run on the share market with its stock up by a significant 14% over the last three months. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. Specifically, we decided to study PS Business Parks' ROE in this article.

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. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for PS Business Parks

How Is ROE Calculated?

Return on equity 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 PS Business Parks is:

12% = US$242m ÷ US$2.0b (Based on the trailing twelve months to September 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 $0.12 in profit.

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

PS Business Parks' Earnings Growth And 12% ROE

At first glance, PS Business Parks seems to have a decent ROE. On comparing with the average industry ROE of 6.6% the company's ROE looks pretty remarkable. This probably laid the ground for PS Business Parks' moderate 10.0% net income growth seen over the past five years.

We then performed a comparison between PS Business Parks' net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 9.0% in the same period.

past-earnings-growth
past-earnings-growth

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. What is PSB worth today? The intrinsic value infographic in our free research report helps visualize whether PSB is currently mispriced by the market.

Is PS Business Parks Making Efficient Use Of Its Profits?

PS Business Parks has a high three-year median payout ratio of 71%. This means that it has only 29% of its income left to reinvest into its business. However, it's not unusual to see a REIT with such a high payout ratio mainly due to statutory requirements. Despite this, the company's earnings grew moderately as we saw above.

Moreover, PS Business Parks 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 61%. Still, forecasts suggest that PS Business Parks' future ROE will rise to 56% even though the the company's payout ratio is not expected to change by much.

Summary

On the whole, we feel that PS Business Parks' performance has been quite good. We are particularly impressed by the considerable earnings growth posted by the company, which was likely backed by its high ROE. While the company is paying out most of its earnings as dividends, it has been able to grow its earnings in spite of it, so that's probably a good sign. Having said that, on studying current analyst estimates, we were concerned to see that while the company has grown its earnings in the past, analysts expect its earnings to shrink in the future. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts 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.

Our goal is to create a safe and engaging place for users to connect over interests and passions. In order to improve our community experience, we are temporarily suspending article commenting