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Community Healthcare Trust Incorporated (NYSE:CHCT) On An Uptrend: Could Fundamentals Be Driving The Stock?

Community Healthcare Trust's (NYSE:CHCT) stock up by 2.4% over the past week. 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. Particularly, we will be paying attention to Community Healthcare Trust's ROE today.

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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

Check out our latest analysis for Community Healthcare Trust

How Is ROE Calculated?

The formula for ROE is:

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

So, based on the above formula, the ROE for Community Healthcare Trust is:

4.9% = US$22m ÷ US$462m (Based on the trailing twelve months to December 2021).

The 'return' refers to a company's earnings over the last year. That means that for every $1 worth of shareholders' equity, the company generated $0.05 in profit.

What Is The Relationship Between ROE And 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.

Community Healthcare Trust's Earnings Growth And 4.9% ROE

When you first look at it, Community Healthcare Trust's ROE doesn't look that attractive. A quick further study shows that the company's ROE doesn't compare favorably to the industry average of 6.4% either. However, we we're pleasantly surprised to see that Community Healthcare Trust grew its net income at a significant rate of 45% in the last five years. We reckon that there could be other factors at play here. Such as - high earnings retention or an efficient management in place.

As a next step, we compared Community Healthcare Trust's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 8.8%.

past-earnings-growth
past-earnings-growth

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). This then helps them determine if the stock is placed for a bright or bleak future. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Community Healthcare Trust is trading on a high P/E or a low P/E, relative to its industry.

Is Community Healthcare Trust Efficiently Re-investing Its Profits?

Community Healthcare Trust seems to be paying out most of its income as dividends judging by its three-year median payout ratio of 100%, meaning the company retains only 0.4% of its income. However, this is typical for REITs as they are often required by law to distribute most of their earnings. In spite of this, the company was able to grow its earnings significantly, as we saw above.

Moreover, Community Healthcare Trust is determined to keep sharing its profits with shareholders which we infer from its long history of seven years of paying a dividend. Our latest analyst data shows that the future payout ratio of the company is expected to drop to 66% over the next three years.

Conclusion

In total, it does look like Community Healthcare Trust has some positive aspects to its business. That is, quite an impressive growth in earnings. However, the low profit retention means that the company's earnings growth could have been higher, had it been reinvesting a higher portion of its profits. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.