Is Healthcare Trust of America, Inc.'s (NYSE:HR) Recent Performance Indicative of Weak Fundamentals?
Looking at Healthcare Trust of America's (NYSE:HR) mostly flat share price movement over the past three months, it is easy to think that there’s nothing interesting about the stock. Add to that, its key financial performance indicators look pretty bleak, and it is common knowledge that fundamentals usually determine the future outcome of a stock in the long-run. Particularly, we will be paying attention to Healthcare Trust of America'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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.
Check out our latest analysis for Healthcare Trust of America
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 Healthcare Trust of America is:
2.9% = US$96m ÷ US$3.3b (Based on the trailing twelve months to March 2022).
The 'return' is the amount earned after tax 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 $0.03 in profit.
What Has ROE Got To Do With Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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. 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 Healthcare Trust of America's Earnings Growth And 2.9% ROE
As you can see, Healthcare Trust of America's ROE looks pretty weak. Even compared to the average industry ROE of 6.5%, the company's ROE is quite dismal. Hence, the flat earnings seen by Healthcare Trust of America over the past five years could probably be the result of it having a lower ROE.
We then compared Healthcare Trust of America's net income growth with the industry and found that the average industry growth rate was 11% in the same period.
Earnings growth is a huge factor in stock valuation. 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. Has the market priced in the future outlook for HR? You can find out in our latest intrinsic value infographic research report.
Is Healthcare Trust of America Using Its Retained Earnings Effectively?
While the company did pay out a portion of its dividend in the past, it currently doesn't pay a dividend. We infer that the company has been reinvesting all of its profits to grow its business.
Conclusion
On the whole, Healthcare Trust of America's performance is quite a big let-down. Because the company is not reinvesting much into the business, and given the low ROE, it's not surprising to see the lack or absence of growth in its earnings. That being so, the latest industry analyst forecasts show that the analysts are expecting to see a huge improvement in the company's earnings growth rate. 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.
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