Healthcare Realty Trust Incorporated's (NYSE:HR) Stock Financial Prospects Look Bleak: Should Shareholders Be Prepared For A Share Price Correction?

By
Simply Wall St
Published
October 11, 2020
NYSE:HR

Healthcare Realty Trust's (NYSE:HR) stock is up by 8.4% over the past three months. However, its weak financial performance indicators makes us a bit doubtful if that trend could continue. In this article, we decided to focus on Healthcare Realty Trust's ROE.

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. 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 Healthcare Realty Trust

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:

5.7% = US$110m ÷ US$1.9b (Based on the trailing twelve months to June 2020).

The 'return' is the income the business earned over the last year. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.06.

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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.

A Side By Side comparison of Healthcare Realty Trust's Earnings Growth And 5.7% ROE

At first glance, Healthcare Realty Trust's ROE doesn't look very promising. However, given that the company's ROE is similar to the average industry ROE of 5.0%, we may spare it some thought. But then again, Healthcare Realty Trust's five year net income shrunk at a rate of 6.2%. Bear in mind, the company does have a slightly low ROE. So that's what might be causing earnings growth to shrink.

However, when we compared Healthcare Realty Trust's growth with the industry we found that while the company's earnings have been shrinking, the industry has seen an earnings growth of 14% in the same period. This is quite worrisome.

past-earnings-growth
NYSE:HR Past Earnings Growth October 11th 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. This then helps them determine if the stock is placed for a bright or bleak future. 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 Using Its Retained Earnings Effectively?

Healthcare Realty Trust has a very high three-year median payout ratio of 78%, implying that it retains only 22% 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.

In addition, Healthcare Realty Trust has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 68%. Regardless, Healthcare Realty Trust's ROE is speculated to decline to 3.5% despite there being no anticipated change in its payout ratio.

Summary

Overall, we would be extremely cautious before making any decision on Healthcare Realty Trust. As a result of its low ROE and lack of mich reinvestment into the business, the company has seen a disappointing earnings growth rate. Moreover, after studying current analyst estimates, we discovered that the company's earnings are expected to continue to shrink in the future. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts 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.
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