Stock Analysis

CareTrust REIT, Inc.'s (NASDAQ:CTRE) Stock Has Seen Strong Momentum: Does That Call For Deeper Study Of Its Financial Prospects?

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NYSE:CTRE
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Most readers would already be aware that CareTrust REIT's (NASDAQ:CTRE) stock increased significantly by 28% over the past three months. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. In this article, we decided to focus on CareTrust REIT's ROE.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

See our latest analysis for CareTrust REIT

How To 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:

8.8% = US$80m ÷ US$916m (Based on the trailing twelve months to September 2020).

The 'return' is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each $1 of shareholders' capital it has, the company made $0.09 in profit.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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 8.8% ROE

When you first look at it, CareTrust REIT's ROE doesn't look that attractive. However, the fact that the company's ROE is higher than the average industry ROE of 5.4%, is definitely interesting. Particularly, the substantial 29% net income growth seen by CareTrust REIT over the past five years is impressive . Bear in mind, the company does have a moderately low ROE. It is just that the industry ROE is lower. So, there might well be other reasons for the earnings to grow. Such as- high earnings retention or the company belonging to a high growth industry.

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 12% in the same period, which is great to see.

past-earnings-growth
NasdaqGS:CTRE Past Earnings Growth December 29th 2020

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. Has the market priced in the future outlook for CTRE? You can find out in our latest intrinsic value infographic research report.

Is CareTrust REIT Making Efficient Use Of Its Profits?

CareTrust REIT has a very high three-year median payout ratio of 78%. This means that it has only 22% 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. Despite this, the company's earnings have grown significantly as we saw above.

Besides, CareTrust REIT has been paying dividends over a period of six years. This shows that the company is committed to sharing profits with its shareholders. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 76%.

Summary

In total, it does look like CareTrust REIT has some positive aspects to its business. Especially the substantial growth in earnings backed by a decent ROE. Despite the company reinvesting only a small portion of its profits, it still has managed to grow its earnings so that is appreciable. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. 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.

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