Is Premier Investments Limited’s (ASX:PMV) latest stock performance a reflection of its financial health?

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Most readers will already know that shares of Premier Investments (ASX:PMV) are up a significant 13% in the past three months. Since the market usually pays for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could influence the market. In particular, we will be paying close attention to Premier Investments’ return on equity today.

Return on equity or ROE is an important factor for a shareholder to consider as it tells them how much of their capital is being reinvested. In simple terms, it is used to assess the profitability of a company in relation to its equity.

Check out our latest analysis for Premier Investments

How to calculate return on equity?

The ROE formula is:

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

So, based on the above formula, the ROE for Premier Investments is:

17% = AU$285 million ÷ AU$1.7 billion (based on trailing 12 months to July 2022).

The “yield” is the profit of the last twelve months. This means that for every Australian dollar of equity, the company generated a profit of 0.17 Australian dollars.

What does ROE have to do with earnings growth?

So far we have learned that ROE is a measure of a company’s profitability. Based on the share of its profits that the company chooses to reinvest or “keep”, we are then able to assess a company’s future ability to generate profits. Generally speaking, all things being equal, companies with high return on equity and earnings retention have a higher growth rate than companies that do not share these attributes.

A side-by-side comparison of Premier Investments’ earnings growth and 17% ROE

For starters, Premier Investments’ ROE looks acceptable. And comparing with the industry, we found that the industry average ROE is similar at 21%. This certainly adds some context to Premier Investments’ outstanding 27% net income growth seen over the past five years. We believe that there could also be other aspects that positively influence the company’s earnings growth. For example, the business has a low payout ratio or is efficiently managed.

We then benchmarked Premier Investments’ net income growth against the industry and are pleased to see that the company’s growth figure is higher than the industry which has a growth rate of 21% over the of the same period.

past earnings-growth

The basis for attaching value to a company is, to a large extent, linked to the growth of its profits. 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 then helps them determine if the stock is positioned for a bright or bleak future. Has the market priced in PMV’s future prospects? You can find out in our latest infographic research report on intrinsic value.

Does Premier Investments use its retained earnings effectively?

The high three-year median payout ratio of 58% (implying that it retains only 42% of profits) for Premier Investments suggests that the company’s growth has not been significantly hampered despite returning most of the profits to its shareholders.

In addition, Premier Investments has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Our latest analyst data shows that the company’s future payout ratio over the next three years is expected to be approximately 66%. Still, forecasts suggest Premier Investments’ future ROE will drop to 13%, even though the company’s payout ratio isn’t expected to change much.

Summary

Overall, we are quite pleased with the performance of Premier Investments. Especially the high ROE, which contributed to the impressive earnings growth. Although the company only reinvests a small portion of its profits, it still managed to grow its profits, which is appreciable. That said, in studying the latest analyst forecasts, we found that while the company has seen growth in past earnings, analysts expect future earnings to decline. For more on the company’s future earnings growth forecast, check out this free analyst forecast report for the company to learn more.

Feedback on this article? Concerned about content? Get in touch with us directly. You can also email the editorial team (at) Simplywallst.com.

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.

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