Is Weakness In LTC Properties, Inc. (NYSE:LTC) Stock A Sign That The Market Could be Wrong Given Its Strong Financial Prospects?

LTC Properties (NYSE:LTC) has had a rough three months with its share price down 30%. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Particularly, we will be paying attention to LTC Properties’ ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Put another way, it reveals the company’s success at turning shareholder investments into profits.

View our latest analysis for LTC Properties

How To Calculate Return On Equity?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity

So, based on the above formula, the ROE for LTC Properties is:

10% = US$81m ÷ US$785m (Based on the trailing twelve months to December 2019).

The ‘return’ is the yearly profit. So, this means that for every $1 of its shareholder’s investments, the company generates a profit of $0.10.

What Has ROE Got To Do With Earnings Growth?

Thus far, we have learnt that ROE measures how efficiently a company is generating its profits. Depending on how much of these profits the company reinvests or “retains”, and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.

A Side By Side comparison of LTC Properties’ Earnings Growth And 10% ROE

To start with, LTC Properties’ ROE looks acceptable. Especially when compared to the industry average of 5.8% the company’s ROE looks pretty impressive. Probably as a result of this, LTC Properties was able to see a decent growth of 13% over the last five years.

We then performed a comparison between LTC Properties’ net income growth with the industry, which revealed that the company’s growth is similar to the average industry growth of 15% in the same period.

NYSE:LTC Past Earnings Growth April 28th 2020
NYSE:LTC Past Earnings Growth April 28th 2020

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock’s future looks promising or ominous. Is LTC Properties fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is LTC Properties Efficiently Re-investing Its Profits?

LTC Properties has a high three-year median payout ratio of 75%. This means that it has only 25% 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. In spite of this, the company was able to grow its earnings by a fair bit, as we saw above.

Moreover, LTC Properties 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. Upon studying the latest analysts’ consensus data, we found that the company’s future payout ratio is expected to drop to 1.9% over the next three years.

Conclusion

On the whole, we feel that LTC Properties’ 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. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. To know more about the company’s future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned.

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