Essential Properties Realty Trust, Inc. (NYSE:EPRT) On An Uptrend: Could Fundamentals Be Driving The Stock?
Essential Properties Realty Trust's (NYSE:EPRT) stock up by 2.7% over the past month. As most would know, long-term fundamentals have a strong correlation with market price movements, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. Particularly, we will be paying attention to Essential Properties Realty Trust's ROE today.
ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
View our latest analysis for Essential Properties Realty 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 Essential Properties Realty Trust is:
6.4% = US$191m ÷ US$3.0b (Based on the trailing twelve months to December 2023).
The 'return' is the yearly profit. Another way to think of that is that for every $1 worth of equity, the company was able to earn $0.06 in profit.
What Is The Relationship Between ROE And Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. 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.
A Side By Side comparison of Essential Properties Realty Trust's Earnings Growth And 6.4% ROE
At first glance, Essential Properties Realty Trust's ROE doesn't look very promising. Although a closer study shows that the company's ROE is higher than the industry average of 5.0% which we definitely can't overlook. Even more so after seeing Essential Properties Realty Trust's exceptional 42% net income growth over the past five years. That being said, the company does have a slightly low ROE to begin with, just that it is higher than the industry average. So, there might well be other reasons for the earnings to grow. E.g the company has a low payout ratio or could belong to a high growth industry.
As a next step, we compared Essential Properties Realty 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 15%.
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. This then helps them determine if the stock is placed for a bright or bleak future. Is Essential Properties Realty Trust fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is Essential Properties Realty Trust Efficiently Re-investing Its Profits?
Essential Properties Realty Trust seems to be paying out most of its income as dividends judging by its three-year median payout ratio of 67%, meaning the company retains only 33% of its income. However, this is typical for REITs as they are often required by law to distribute most of their earnings. Despite this, the company's earnings have grown significantly as we saw above.
Additionally, Essential Properties Realty Trust has paid dividends over a period of six years which means that the company is pretty serious about sharing its profits with shareholders. Our latest analyst data shows that the future payout ratio of the company is expected to rise to 99% over the next three years. Despite the higher expected payout ratio, the company's ROE is not expected to change by much.
Summary
In total, it does look like Essential Properties Realty Trust has some positive aspects to its business. Especially the substantial growth in earnings backed by a decent ROE. Despite the company reinvesting only a small portion of its profits, it still has managed to grow its earnings so that is appreciable. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. 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.
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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.
