Healthcare Realty Trust (NYSE:HR) has had a rough three months with its share price down 13%. To decide if this trend could continue, we decided to look at its weak fundamentals as they shape the long-term market trends. Specifically, we decided to study Healthcare Realty Trust’s ROE in this article.
ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In simpler terms, it measures the profitability of a company in relation to shareholder’s equity.
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 Healthcare Realty Trust is:
2.1% = US$39m ÷ US$1.9b (Based on the trailing twelve months to March 2020).
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 $0.02 in profit.
What Is The Relationship Between ROE And Earnings Growth?
Thus far, we have learnt that ROE measures how efficiently a company is generating its profits. Based on how much of its profits the company chooses to reinvest or “retain”, we are then able to evaluate a company’s future ability to generate profits. 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.
Healthcare Realty Trust’s Earnings Growth And 2.1% ROE
As you can see, Healthcare Realty Trust’s ROE looks pretty weak. Even when compared to the industry average of 5.6%, the ROE figure is pretty disappointing. For this reason, Healthcare Realty Trust’s five year net income decline of 10% is not surprising given its lower ROE. We reckon that there could also be other factors at play here. Such as – low earnings retention or poor allocation of capital.
So, as a next step, we compared Healthcare Realty Trust’s performance against the industry and were disappointed to discover that while the company has been shrinking its earnings, the industry has been growing its earnings at a rate of 14% in the same period.
Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. What is HR worth today? The intrinsic value infographic in our free research report helps visualize whether HR is currently mispriced by the market.
Is Healthcare Realty Trust Efficiently Re-investing Its Profits?
Healthcare Realty Trust has a very high three-year median payout ratio of 80%, implying that it retains only 20% of its profits. However, it’s not unusual to see a REIT with such a high payout ratio mainly due to statutory requirements. Accordingly, this likely explains why its earnings have been shrinking.
Moreover, Healthcare Realty Trust has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth. Our latest analyst data shows that the future payout ratio of the company is expected to drop to 0.5% over the next three years. As a result, the expected drop in Healthcare Realty Trust’s payout ratio explains the anticipated rise in the company’s future ROE to 2.5%, over the same period.
On the whole, Healthcare Realty Trust’s performance is quite a big let-down. Because the company is not reinvesting much into the business, and given the low ROE, it’s not surprising to see the lack or absence of growth in its earnings. Having said that, looking at current analyst estimates, we found that the company’s earnings growth rate is expected to see a huge improvement. 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.
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This article by Simply Wall St is general in nature. 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. Thank you for reading.