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Spirit Realty Capital, Inc.'s (NYSE:SRC) Stock Financial Prospects Look Bleak: Should Shareholders Be Prepared For A Share Price Correction?

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Spirit Realty Capital's (NYSE:SRC) stock is up by 6.5% over the past three months. However, its weak financial performance indicators makes us a bit doubtful if that trend could continue. Specifically, we decided to study Spirit Realty Capital'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.

View our latest analysis for Spirit Realty Capital

How To Calculate Return On Equity?

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 Spirit Realty Capital is:

1.2% = US$41m ÷ US$3.5b (Based on the trailing twelve months to March 2021).

The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every $1 worth of equity, the company was able to earn $0.01 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. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.

Spirit Realty Capital's Earnings Growth And 1.2% ROE

It is hard to argue that Spirit Realty Capital's ROE is much good in and of itself. Not just that, even compared to the industry average of 5.1%, the company's ROE is entirely unremarkable. Thus, the low net income growth of 2.1% seen by Spirit Realty Capital over the past five years could probably be the result of it having a lower ROE.

As a next step, we compared Spirit Realty Capital's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 10.0% in the same period.

past-earnings-growth
past-earnings-growth

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. 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 Spirit Realty Capital is trading on a high P/E or a low P/E, relative to its industry.

Is Spirit Realty Capital Making Efficient Use Of Its Profits?

Spirit Realty Capital seems to be paying out most of its income as dividends judging by its three-year median payout ratio of 93% (or a retention ratio of 7.3%). However, this is typical for REITs as they are often required by law to distribute most of their earnings. So this probably explains the low earnings growth seen by the company.

Moreover, Spirit Realty Capital has been paying dividends for eight years, which is a considerable amount of time, suggesting that management must have perceived that the shareholders prefer dividends over earnings growth. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 78%. Still, forecasts suggest that Spirit Realty Capital's future ROE will rise to 3.8% even though the the company's payout ratio is not expected to change by much.

Summary

On the whole, Spirit Realty Capital's performance is quite a big let-down. The company has seen a lack of earnings growth as a result of retaining very little profits and whatever little it does retain, is being reinvested at a very low rate of return. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. 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.

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