Essential Properties Realty Trust, Inc.'s (NYSE:EPRT) Stock Has Shown Weakness Lately But Financial Prospects Look Decent: Is The Market Wrong?

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editorial-team@simplywallst.com (Simply Wall St)

Thu, Feb 13, 2025, 5:23 AM 4 min read

Essential Properties Realty Trust (NYSE:EPRT) has had a rough three months with its share price down 6.0%. But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. In this article, we decided to focus on Essential Properties Realty Trust's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. 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 Essential Properties Realty Trust

How Is ROE Calculated?

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 Essential Properties Realty Trust is:

6.2% = US$197m ÷ US$3.2b (Based on the trailing twelve months to September 2024).

The 'return' is the profit over the last twelve months. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.06.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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. 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 6.2% ROE

On the face of it, Essential Properties Realty Trust's ROE is not much to talk about. Yet, a closer study shows that the company's ROE is similar to the industry average of 6.0%. Particularly, the exceptional 35% net income growth seen by Essential Properties Realty Trust over the past five years is pretty remarkable. Considering the moderately low ROE, it is quite possible that there might be some other aspects that are positively influencing the company's earnings growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

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 19% in the same 5-year period.

past-earnings-growth — NYSE:EPRT Past Earnings Growth February 13th 2025

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about Essential Properties Realty Trust's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Essential Properties Realty Trust Using Its Retained Earnings Effectively?

Essential Properties Realty Trust seems to be paying out most of its income as dividends judging by its three-year median payout ratio of 65%, meaning the company retains only 35% of its income. However, this is typical for REITs as they are often required by law to distribute most of their earnings. In spite of this, the company was able to grow its earnings significantly, as we saw above.

Besides, Essential Properties Realty Trust has been paying dividends over a period of seven years. This shows that the company is committed to sharing profits with its shareholders. Looking at the current analyst consensus data, we can see that the company's future payout ratio is expected to rise to 91% over the next three years. Regardless, the ROE is not expected to change much for the company despite the higher expected payout ratio.

Conclusion

On the whole, we do feel that Essential Properties Realty Trust has some positive attributes. 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. 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.