Stock Analysis

Declining Stock and Decent Financials: Is The Market Wrong About Sabra Health Care REIT, Inc. (NASDAQ:SBRA)?

  •  Updated
NasdaqGS:SBRA
Source: Shutterstock

With its stock down 4.8% over the past week, it is easy to disregard Sabra Health Care REIT (NASDAQ:SBRA). 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. Specifically, we decided to study Sabra Health Care REIT'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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for Sabra Health Care REIT

How Is ROE Calculated?

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 Sabra Health Care REIT is:

4.1% = US$138m ÷ US$3.4b (Based on the trailing twelve months to December 2020).

The 'return' is the amount earned after tax over the last twelve months. That means that for every $1 worth of shareholders' equity, the company generated $0.04 in profit.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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. 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.

Sabra Health Care REIT's Earnings Growth And 4.1% ROE

At first glance, Sabra Health Care REIT's ROE doesn't look very promising. Yet, a closer study shows that the company's ROE is similar to the industry average of 5.1%. Having said that, Sabra Health Care REIT has shown a modest net income growth of 13% over the past five years. Considering the moderately low ROE, it is quite possible that there might be some other aspects that are positively influencing the company's earnings growth. 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 Sabra Health Care REIT's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 11% in the same period.

past-earnings-growth
NasdaqGS:SBRA Past Earnings Growth March 2nd 2021

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. Is Sabra Health Care REIT fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Sabra Health Care REIT Efficiently Re-investing Its Profits?

Sabra Health Care REIT seems to be paying out most of its income as dividends judging by its three-year median payout ratio of 86%, meaning the company retains only 14% 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.

Moreover, Sabra Health Care REIT 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. Our latest analyst data shows that the future payout ratio of the company is expected to drop to 66% over the next three years.

Summary

On the whole, we do feel that Sabra Health Care REIT has some positive attributes. Namely, its high earnings growth. We do however feel that the earnings growth number could have been even higher, had the company been reinvesting more of its earnings and paid out less dividends. 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.

If you’re looking to trade Sabra Health Care REIT, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted


Valuation is complex, but we're helping make it simple.

Find out whether Sabra Health Care REIT is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

View the Free Analysis