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Most readers would already be aware that Four Corners Property Trust's (NYSE:FCPT) stock increased significantly by 5.3% over the past week. However, we wonder if the company's inconsistent financials would have any adverse impact on the current share price momentum. Specifically, we decided to study Four Corners Property Trust's ROE in this article.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.
How To Calculate Return On Equity?
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 Four Corners Property Trust is:
9.0% = US$87m ÷ US$975m (Based on the trailing twelve months to March 2022).
The 'return' is the income the business earned over the last year. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.09.
What Has ROE Got To Do With Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.
Four Corners Property Trust's Earnings Growth And 9.0% ROE
On the face of it, Four Corners Property Trust's ROE is not much to talk about. Although a closer study shows that the company's ROE is higher than the industry average of 6.5% which we definitely can't overlook. Having said that, Four Corners Property Trust's net income growth over the past five years is more or less flat. Remember, the company's ROE is a bit low to begin with, just that it is higher than the industry average. Hence, this goes some way in explaining the flat earnings growth.
We then compared Four Corners Property Trust's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 11% in the same period, which is a bit concerning.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Four Corners Property Trust's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Four Corners Property Trust Using Its Retained Earnings Effectively?
Four Corners Property Trust seems to be paying out most of its income as dividends judging by its three-year median payout ratio of 80%, meaning that the company retains only 20% of its profits. However, this is typical for REITs as they are often required by law to distribute most of their earnings. Accordingly, this suggests that the company's earnings growth was miniscule as a result of the high payout.
Additionally, Four Corners Property Trust has paid dividends over a period of six years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 84%. Therefore, the company's future ROE is also not expected to change by much with analysts predicting an ROE of 9.5%.
In total, we're a bit ambivalent about Four Corners Property Trust's performance. Specifically, the low earnings growth is a bit concerning, especially given that the company has a respectable rate of return. Investors may have benefitted, had the company been reinvesting more of its earnings. As discussed earlier, the company is retaining a small portion of its profits. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. 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.