Spirit Realty Capital (NYSE:SRC) has had a great run on the share market with its stock up by a significant 10% over the last three months. We, however wanted to have a closer look at its key financial indicators as the markets usually pay for long-term fundamentals, and in this case, they don’t look very promising. Particularly, we will be paying attention to Spirit Realty Capital’s ROE today.
ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In simpler terms, it measures the profitability of a company in relation to shareholder’s equity.
See our latest analysis for Spirit Realty Capital
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 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. That means that for every $1 worth of shareholders’ equity, the company generated $0.01 in profit.
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.
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. Therefore, the disappointing ROE therefore provides a background to Spirit Realty Capital’s very little net income growth of 2.1% over the past five years.
Next, on comparing with the industry net income growth, we found that Spirit Realty Capital’s reported growth was lower than the industry growth of 9.9% in the same period, which is not something we like to see.
NYSE:SRC Past Earnings Growth July 5th 2021
Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock’s future looks promising or ominous. Is Spirit Realty Capital fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is Spirit Realty Capital Using Its Retained Earnings Effectively?
Spirit Realty Capital has a very high three-year median payout ratio of93%, implying that it retains only 7.3% of its profits. However, it’s not unusual to see a REIT with such a high payout ratio mainly due to statutory requirements. 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. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 76%. Still, forecasts suggest that Spirit Realty Capital’s future ROE will rise to 4.0% even though the the company’s payout ratio is not expected to change by much.
On the whole, Spirit Realty Capital’s performance is quite a big let-down. Because the company is not reinvesting much into the business, and given the low ROE, it’s not surprising to see the lack or absence of growth in its earnings. 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 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. 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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