Does National Retail Properties, Inc.'s (NYSE:NNN) Weak Fundamentals Mean That The Stock Could Move In The Opposite Direction?

National Retail Properties' (NYSE:NNN) stock is up by 4.3% over the past month. However, its weak financial performance indicators makes us a bit doubtful if that trend could continue. Particularly, we will be paying attention to National Retail Properties' ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

See our latest analysis for National Retail Properties

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 National Retail Properties is:

6.4% = US$274m ÷ US$4.3b (Based on the trailing twelve months to September 2021).

The 'return' is the yearly profit. One way to conceptualize this is that for each $1 of shareholders' capital it has, the company made $0.06 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. 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. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

A Side By Side comparison of National Retail Properties' Earnings Growth And 6.4% ROE

When you first look at it, National Retail Properties' ROE doesn't look that attractive. However, given that the company's ROE is similar to the average industry ROE of 6.6%, we may spare it some thought. On the other hand, National Retail Properties reported a fairly low 2.2% net income growth over the past five years. Bear in mind, the company's ROE is not very high . Hence, this does provide some context to low earnings growth seen by the company.

As a next step, we compared National Retail Properties' net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 9.0% in the same period.

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. What is NNN worth today? The intrinsic value infographic in our free research report helps visualize whether NNN is currently mispriced by the market.

Is National Retail Properties Using Its Retained Earnings Effectively?

National Retail Properties has a very high three-year median payout ratio of72%, implying that it retains only 28% 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 suggests that the company's earnings growth was lower as a result of the high payout.

Moreover, National Retail Properties has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 71% of its profits over the next three years. However, National Retail Properties' ROE is predicted to rise to 8.2% despite there being no anticipated change in its payout ratio.

Conclusion

In total, we would have a hard think before deciding on any investment action concerning National Retail Properties. The company has seen a lack of earnings growth as a result of retaining very little profits and whatever little it does retain, is being reinvested at a very low rate of return. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. 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. 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.