Are CareTrust REIT, Inc.'s (NASDAQ:CTRE) Fundamentals Good Enough to Warrant Buying Given The Stock's Recent Weakness?

By
Simply Wall St
Published
May 08, 2022
NasdaqGS:CTRE
Source: Shutterstock

With its stock down 13% over the past three months, it is easy to disregard CareTrust REIT (NASDAQ:CTRE). But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. Particularly, we will be paying attention to CareTrust REIT's ROE today.

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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for CareTrust REIT

How Do You Calculate Return On Equity?

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 CareTrust REIT is:

1.0% = US$8.2m ÷ US$845m (Based on the trailing twelve months to March 2022).

The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every $1 worth of equity, the company was able to earn $0.01 in profit.

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

CareTrust REIT's Earnings Growth And 1.0% ROE

It is quite clear that CareTrust REIT's ROE is rather low. Not just that, even compared to the industry average of 6.5%, the company's ROE is entirely unremarkable. Although, we can see that CareTrust REIT saw a modest net income growth of 15% over the past five years. Therefore, the growth in earnings could probably have been caused by other variables. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

Next, on comparing with the industry net income growth, we found that CareTrust REIT's growth is quite high when compared to the industry average growth of 11% in the same period, which is great to see.

past-earnings-growth
NasdaqGS:CTRE Past Earnings Growth May 8th 2022

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. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about CareTrust REIT's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is CareTrust REIT Making Efficient Use Of Its Profits?

CareTrust REIT seems to be paying out most of its income as dividends judging by its three-year median payout ratio of 74%, meaning the company retains only 26% of its income. However, this is typical for REITs as they are often required by law to distribute most of their earnings. Despite this, the company's earnings grew moderately as we saw above.

Besides, CareTrust REIT has been paying dividends over a period of eight years. This shows that the company is committed to sharing profits with its shareholders. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 71%.

Conclusion

In total, it does look like CareTrust REIT has some positive aspects to its business. That is, quite an impressive growth in earnings. However, the low profit retention means that the company's earnings growth could have been higher, had it been reinvesting a higher portion of its profits. On studying current analyst estimates, we found that analysts expect the company to continue its recent growth streak. 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.

Discounted cash flow calculation for every stock

Simply Wall St does a detailed discounted cash flow calculation every 6 hours for every stock on the market, so if you want to find the intrinsic value of any company just search here. It’s FREE.

Make Confident Investment Decisions

Simply Wall St's Editorial Team provides unbiased, factual reporting on global stocks using in-depth fundamental analysis.
Find out more about our editorial guidelines and team.