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Should Weakness in Essential Properties Realty Trust, Inc.'s (NYSE:EPRT) Stock Be Seen As A Sign That Market Will Correct The Share Price Given Decent Financials?

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Essential Properties Realty Trust (NYSE:EPRT) has had a rough three months with its share price down 12%. 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 Essential Properties Realty Trust'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 Essential Properties Realty Trust

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 Essential Properties Realty Trust is:

3.7% = US$72m ÷ US$1.9b (Based on the trailing twelve months to September 2021).

The 'return' is the profit over the last twelve months. That means that for every $1 worth of shareholders' equity, the company generated $0.04 in profit.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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 all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

Essential Properties Realty Trust's Earnings Growth And 3.7% ROE

As you can see, Essential Properties Realty Trust's ROE looks pretty weak. Even when compared to the industry average of 6.6%, the ROE figure is pretty disappointing. In spite of this, Essential Properties Realty Trust was able to grow its net income considerably, at a rate of 49% 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.

We then compared Essential Properties Realty Trust's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 9.0% in the same period.

past-earnings-growth
past-earnings-growth

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Essential Properties Realty Trust fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Essential Properties Realty Trust Making Efficient Use Of 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 78%, meaning the company retains only 22% 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.

Besides, Essential Properties Realty Trust has been paying dividends over a period of three years. This shows that the company is committed to sharing profits with its shareholders. Our latest analyst data shows that the future payout ratio of the company is expected to drop to 60% over the next three years. The fact that the company's ROE is expected to rise to 6.1% over the same period is explained by the drop in the payout ratio.

Conclusion

In total, it does look like Essential Properties Realty Trust has some positive aspects to its business. That is, quite an impressive growth in earnings. However, the low profit retention means that the company's earnings growth could have been higher, had it been reinvesting a higher portion of its profits. 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 latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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

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.