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.

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.