With its stock down 16% in the past three months, it’s easy to overlook Spirit Realty Capital (NYSE:SRC). But if you pay close attention, you might find that its leading financial indicators look pretty decent, which could mean the stock could potentially rise in the long run as markets generally reward more resilient long-term fundamentals. In particular, we’ll be paying attention to Spirit Realty Capital’s ROE today.
Return on equity or ROE is an important factor for a shareholder to consider as it tells them how much of their capital is being reinvested. In short, ROE shows the profit that each dollar generates in relation to the investments of its shareholders.
Check out our latest analysis for Spirit Realty Capital
How do you calculate return on equity?
Return on equity can be calculated using the formula:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE for Spirit Realty Capital is:
5.4% = $229 million ÷ $4.3 billion (based on trailing 12 months to March 2022).
The “return” is the annual profit. One way to conceptualize this is that for every $1 of share capital it has, the firm has made a profit of $0.05.
What is the relationship between ROE and earnings growth?
So far, we have learned that ROE measures how efficiently a company generates its profits. Depending on how much of its profits the company chooses to reinvest or “keep”, we are then able to assess a company’s future ability to generate profits. Assuming everything else remains unchanged, the higher the ROE and earnings retention, the higher a company’s growth rate compared to companies that don’t necessarily exhibit these characteristics.
Profit growth and ROE of 5.4% from Spirit Realty Capital
When you first look at it, Spirit Realty Capital’s ROE doesn’t look that appealing. However, since the company’s ROE is similar to the industry average ROE of 6.5%, we can spare it some thought. On the other hand, Spirit Realty Capital has seen moderate net income growth of 15% over the past five years. Given the slightly weak ROE, it is likely that other factors could be driving this growth. For example, it is possible that the management of the company has made good strategic decisions or that the company has a low payout ratio.
We then compared Spirit Realty Capital’s net income growth with the industry and we are pleased to see that the growth figure for the company is higher compared to the industry which has a growth rate of 11%. during the same period.
The basis for attaching value to a company is, to a large extent, linked to the growth of its profits. It is important for an investor to know whether the market has priced in the expected growth (or decline) in the company’s earnings. This will help them determine if the future of the title looks bright or ominous. Is Spirit Realty Capital correctly valued compared to other companies? These 3 assessment metrics might help you decide.
Does Spirit Realty Capital effectively use its retained earnings?
Spirit Realty Capital appears to be paying out most of its income in the form of dividends judging by its three-year median payout ratio of 82%, which means the company only keeps 18% of its income. However, this is typical for REITs as they are often required by law to distribute most of their profits. Despite this, the company’s earnings grew moderately as seen above.
Additionally, Spirit Realty Capital pays dividends over a nine-year period. This shows that the company is committed to sharing profits with its shareholders. Based on the latest analyst estimates, we found that the company’s future payout ratio over the next three years is expected to remain stable at 69%. As a result, forecasts suggest that Spirit Realty Capital’s future ROE will be 4.8%, which is again similar to the current ROE.
All in all, it seems that Spirit Realty Capital has positive aspects for its business. That is, quite impressive revenue growth. However, low earnings retention means the company’s earnings growth could have been higher had it reinvested more of its earnings. That said, the company’s earnings growth is expected to slow, as expected in current analyst estimates. For more on the company’s future earnings growth forecast, check out this free analyst forecast report for the company to learn more.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.