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Has Healthcare Trust of America, Inc. (NYSE:HTA) Stock's Recent Performance Got Anything to Do With Its Financial Health?

Simply Wall St
·4 mins read

Most readers would already know that Healthcare Trust of America's (NYSE:HTA) stock increased by 7.4% over the past three months. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to investigate if the company's decent financials had a hand to play in the recent price move. Specifically, we decided to study Healthcare Trust of America's 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.

See 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:

1.0% = US$35m ÷ US$3.4b (Based on the trailing twelve months to March 2020).

The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each $1 of shareholders' capital it has, the company made $0.01 in profit.

What Has ROE Got To Do With 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. 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.

Healthcare Trust of America's Earnings Growth And 1.0% ROE

It is quite clear that Healthcare Trust of America's ROE is rather low. Even when compared to the industry average of 5.1%, the ROE figure is pretty disappointing. In spite of this, Healthcare Trust of America was able to grow its net income considerably, at a rate of 25% 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 Healthcare Trust of America'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 14%.

past-earnings-growth
past-earnings-growth

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. 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 HTA? You can find out in our latest intrinsic value infographic research report.

Is Healthcare Trust of America Using Its Retained Earnings Effectively?

Healthcare Trust of America 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. Despite this, the company's earnings have grown significantly as we saw above.

Moreover, Healthcare Trust of America is determined to keep sharing its profits with shareholders which we infer from its long history of eight years of paying a dividend. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 73% of its profits over the next three years. Still, forecasts suggest that Healthcare Trust of America's future ROE will rise to 2.6% even though the the company's payout ratio is not expected to change by much.

Conclusion

In total, it does look like Healthcare Trust of America has some positive aspects to its business. Namely, its high earnings growth. We do however feel that the earnings growth number could have been even higher, had the company been reinvesting more of its earnings and paid out less dividends. 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 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. 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.

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