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

Fri, Sep 29, 2023, 4:48 AM 4 min read

It is hard to get excited after looking at Essential Properties Realty Trust's (NYSE:EPRT) recent performance, when its stock has declined 9.5% over the past month. However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. 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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

View our latest analysis for Essential Properties Realty Trust

How Is ROE Calculated?

ROE 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:

6.0% = US$168m ÷ US$2.8b (Based on the trailing twelve months to June 2023).

The 'return' refers to a company's earnings over the last year. That means that for every $1 worth of shareholders' equity, the company generated $0.06 in profit.

Why Is ROE Important For 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. 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.

A Side By Side comparison of Essential Properties Realty Trust's Earnings Growth And 6.0% ROE

At first glance, Essential Properties Realty Trust's ROE doesn't look very promising. However, its ROE is similar to the industry average of 6.0%, so we won't completely dismiss the company. Particularly, the exceptional 46% 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. 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 16% in the same 5-year period.

past-earnings-growth — NYSE:EPRT Past Earnings Growth September 29th 2023

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. This then helps them determine if the stock is placed for a bright or bleak future. 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 Efficiently Re-investing Its Profits?

Essential Properties Realty Trust has a very high three-year median payout ratio of 69%. This means that it has only 31% of its income left to reinvest into its business. However, it's not unusual to see a REIT with such a high payout ratio mainly due to statutory requirements. Regardless, this hasn't hampered its ability to grow as we saw earlier.

Besides, Essential Properties Realty Trust has been paying dividends over a period of five years. This shows that the company is committed to sharing profits with its shareholders. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to rise to 104% over the next three years. Despite the higher expected payout ratio, the company's ROE is not expected to change by much.

Summary

On the whole, we do feel that Essential Properties Realty Trust has some positive attributes. 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. 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 latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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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.