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Easterly Government Properties, Inc.'s (NYSE:DEA) Stock Has Shown Weakness Lately But Financial Prospects Look Decent: Is The Market Wrong?

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·4 min read
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  • DEA

With its stock down 7.4% over the past three months, it is easy to disregard Easterly Government Properties (NYSE:DEA). However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. Specifically, we decided to study Easterly Government Properties' ROE in this article.

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.

View our latest analysis for Easterly Government Properties

How Is ROE Calculated?

Return on equity 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 Easterly Government Properties is:

1.8% = US$25m ÷ US$1.3b (Based on the trailing twelve months to June 2021).

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 $0.02 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.

Easterly Government Properties' Earnings Growth And 1.8% ROE

As you can see, Easterly Government Properties' ROE looks pretty weak. Not just that, even compared to the industry average of 5.9%, the company's ROE is entirely unremarkable. In spite of this, Easterly Government Properties was able to grow its net income considerably, at a rate of 37% in the last five years. Therefore, there could be other reasons behind this growth. For instance, the company has a low payout ratio or is being managed efficiently.

Next, on comparing with the industry net income growth, we found that Easterly Government Properties' growth is quite high when compared to the industry average growth of 9.3% in the same period, which is great to see.

past-earnings-growth
past-earnings-growth

Earnings growth is an important metric to consider when valuing a stock. 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. 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 Easterly Government Properties is trading on a high P/E or a low P/E, relative to its industry.

Is Easterly Government Properties Making Efficient Use Of Its Profits?

Easterly Government Properties seems to be paying out most of its income as dividends judging by its three-year median payout ratio of 75%, meaning the company retains only 25% of its income. However, this is typical for REITs as they are often required by law to distribute most of their earnings. Regardless, this hasn't hampered its ability to grow as we saw earlier.

Besides, Easterly Government Properties has been paying dividends over a period of six years. This shows that the company is committed to sharing profits with its shareholders. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 78% of its profits over the next three years. Still, forecasts suggest that Easterly Government Properties' future ROE will rise to 3.0% even though the the company's payout ratio is not expected to change by much.

Conclusion

On the whole, we do feel that Easterly Government Properties has some positive attributes. While no doubt its earnings growth is pretty substantial, we do feel that the reinvestment rate is pretty low, meaning, the earnings growth number could have been significantly higher had the company been retaining more of its profits. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. 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.

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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