Would Financials Be Able To Push NorthWest Healthcare Properties Real Estate Investment Trust's (TSE:NWH.UN) Stock Prices Higher In The Near Future?
NorthWest Healthcare Properties Real Estate Investment Trust's (TSE:NWH.UN) stock was mostly flat over the past three months. However, the company's key financials probably have more to say so you may want to give the company a closer look given that stock prices usually follow the long-term financial performance of a business. Particularly, we will be paying attention to NorthWest Healthcare Properties Real Estate Investment Trust's ROE today.
Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
Check out our latest analysis for NorthWest Healthcare Properties Real Estate Investment 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 NorthWest Healthcare Properties Real Estate Investment Trust is:
13% = CA$346m ÷ CA$2.7b (Based on the trailing twelve months to March 2021).
The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every CA$1 worth of equity, the company was able to earn CA$0.13 in profit.
Why Is ROE Important For Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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 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 NorthWest Healthcare Properties Real Estate Investment Trust's Earnings Growth And 13% ROE
At first glance, NorthWest Healthcare Properties Real Estate Investment Trust seems to have a decent ROE. Especially when compared to the industry average of 7.7% the company's ROE looks pretty impressive. Probably as a result of this, NorthWest Healthcare Properties Real Estate Investment Trust was able to see a decent growth of 9.4% over the last five years.
Next, on comparing with the industry net income growth, we found that NorthWest Healthcare Properties Real Estate Investment Trust's reported growth was lower than the industry growth of 15% in the same period, which is not something we like to see.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if NorthWest Healthcare Properties Real Estate Investment Trust is trading on a high P/E or a low P/E, relative to its industry.
Is NorthWest Healthcare Properties Real Estate Investment Trust Efficiently Re-investing Its Profits?
NorthWest Healthcare Properties Real Estate Investment Trust seems to be paying out most of its income as dividends judging by its three-year median payout ratio of 81%, meaning the company retains only 19% 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 by a fair bit, as we saw above.
Moreover, NorthWest Healthcare Properties Real Estate Investment Trust is determined to keep sharing its profits with shareholders which we infer from its long history of six years of paying a dividend.
Conclusion
In total, it does look like NorthWest Healthcare Properties Real Estate Investment Trust has some positive aspects to its business. Its earnings have grown respectably as we saw earlier, which was likely due to the company reinvesting its earnings at a pretty high rate of return. However, given the high ROE, we do think that the company is reinvesting a small portion of its profits. This could likely be preventing the company from growing to its full extent. With that said, on studying the latest analyst forecasts, we found that while the company has seen growth in its past earnings, analysts expect its future earnings to shrink. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.
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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