Is National Health Investors, Inc.'s (NYSE:NHI) Stock Price Struggling As A Result Of Its Mixed Financials?

With its stock down 13% over the past three months, it is easy to disregard National Health Investors (NYSE:NHI). We, however decided to study the company's financials to determine if they have got anything to do with the price decline. Long-term fundamentals are usually what drive market outcomes, so it's worth paying close attention. Particularly, we will be paying attention to National Health Investors' 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. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out our latest analysis for National Health Investors

How To Calculate Return On Equity?

The formula for return on equity is:

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

So, based on the above formula, the ROE for National Health Investors is:

9.2% = US$143m ÷ US$1.5b (Based on the trailing twelve months to September 2021).

The 'return' is the profit over the last twelve months. Another way to think of that is that for every $1 worth of equity, the company was able to earn $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. 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.

National Health Investors' Earnings Growth And 9.2% ROE

At first glance, National Health Investors' ROE doesn't look very promising. However, the fact that the its ROE is quite higher to the industry average of 6.6% doesn't go unnoticed by us. Still, National Health Investors has seen a flat net income growth over the past five years. Remember, the company's ROE is a bit low to begin with, just that it is higher than the industry average. Therefore, the low to flat growth in earnings could also be the result of this.

We then compared National Health Investors' net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 9.2% in the same period, which is a bit concerning.

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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about National Health Investors''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is National Health Investors Making Efficient Use Of Its Profits?

National Health Investors has a very high three-year median payout ratio of 75% (or a retention ratio of 25%). However, it's not unusual to see a REIT with such a high payout ratio mainly due to statutory requirements. Accordingly, this suggests that the company's earnings growth was miniscule as a result of the high payout.

Additionally, National Health Investors has paid dividends over a period of at least ten years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 65%.

Conclusion

In total, we're a bit ambivalent about National Health Investors' performance. On the one hand, the company does have a decent rate of return, however, its earnings growth number is quite disappointing and as discussed earlier, the low retained earnings is hampering the growth. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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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