Could the market be wrong about PotlatchDeltic Corporation (NASDAQ:PCH) given its attractive financial outlook?
It’s hard to get excited after watching the recent performance of PotlatchDeltic Inc (NASDAQ:PCH), as its stock is down 10% in the past month. However, a closer look at his healthy finances might make you think again. Since fundamentals generally determine long-term market outcomes, the company is worth looking into. In this article, we decided to focus on the ROE of PotlatchDeltic.
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 other words, it reveals the company’s success in turning shareholders’ investments into profits.
See our latest analysis for PotlatchDeltic
How to calculate return on equity?
ROE can be calculated using the formula:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE for PotlatchDeltic is:
21% = $389 million ÷ $1.8 billion (based on trailing 12 months to June 2022).
The “return” is the annual profit. This means that for every dollar of shareholders’ equity, the company generated $0.21 in profit.
What is the relationship between ROE and earnings growth?
We have already established that ROE serves as an effective profit-generating indicator for a company’s future earnings. Depending on how much of those earnings the company reinvests or “keeps”, and how efficiently it does so, we are then able to assess a company’s earnings growth potential. Assuming all else is equal, companies that have both a higher return on equity and better earnings retention are generally the ones with a higher growth rate compared to companies that don’t. same characteristics.
PotlatchDeltic earnings growth and ROE of 21%
For starters, PotlatchDeltic seems to have a respectable ROE. Especially when compared to the industry average of 6.6%, the company’s ROE looks quite impressive. Probably because of this, PotlatchDeltic has been able to see an impressive net income growth of 42% over the past five years. We believe there could be other factors at play here as well. Such as – high revenue retention or effective management in place.
As a next step, we benchmarked PotlatchDeltic’s net income growth against the industry, and fortunately, we found that the growth the company saw was above the industry average growth of 11%.
Earnings growth is an important factor in stock valuation. 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. A good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings outlook. So, you might want to check if PotlatchDeltic is trading on a high P/E or a low P/E, relative to its industry.
Is PotlatchDeltic effectively using its retained earnings?
PotlatchDeltic appears to be paying out the bulk of its earnings as dividends judging by its three-year median payout ratio of 67%, which means the company only keeps 33% of its earnings. However, this is typical for REITs as they are often required by law to distribute most of their profits. Despite this, the company’s profits have increased significantly as seen above.
Additionally, PotlatchDeltic has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders.
Overall, we’re pretty happy with PotlatchDeltic’s performance. 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. However, according to the latest forecasts from industry analysts, the company’s earnings are likely to decline in the future. To learn more about the latest analyst forecasts for the company, check out this analyst forecast visualization for the company.
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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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