Sabra Health Care REIT (NASDAQ:SBRA) has had a rough week with its share price down 5.9%. But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. Particularly, we will be paying attention to Sabra Health Care REIT'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. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
How Do You Calculate Return On Equity?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Sabra Health Care REIT is:
4.1% = US$138m ÷ US$3.4b (Based on the trailing twelve months to December 2020).
The 'return' is the yearly profit. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.04.
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 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.
Sabra Health Care REIT's Earnings Growth And 4.1% ROE
At first glance, Sabra Health Care REIT's ROE doesn't look very promising. However, given that the company's ROE is similar to the average industry ROE of 4.6%, we may spare it some thought. Having said that, Sabra Health Care REIT has shown a modest net income growth of 13% over the past five years. 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.
Next, on comparing with the industry net income growth, we found that Sabra Health Care REIT's growth is quite high when compared to the industry average growth of 10% in the same period, which is great to see.NasdaqGS:SBRA Past Earnings Growth May 6th 2021
Earnings growth is an important metric to consider when valuing a stock. 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. 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 Sabra Health Care REIT is trading on a high P/E or a low P/E, relative to its industry.
Is Sabra Health Care REIT Efficiently Re-investing Its Profits?
Sabra Health Care REIT seems to be paying out most of its income as dividends judging by its three-year median payout ratio of 86%, meaning the company retains only 14% 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.
Additionally, Sabra Health Care REIT has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 72% of its profits over the next three years.
Overall, we feel that Sabra Health Care REIT certainly does have some positive factors to consider. Namely, its high earnings growth. We do however feel that the earnings growth number could have been even higher, had the company been reinvesting more of its earnings and paid out less dividends. 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 company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.
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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
In This StorySBRA
Latest Nasdaq-Listed Companies Videos
- What Kind Of Investors Own Most Of Apple Inc. (NASDAQ:AAPL)?
- Costco Wholesale Corporation (NASDAQ:COST) Looks Interesting, And It's About To Pay A Dividend
- Niu Technologies (NASDAQ:NIU) Stocks Pounded By 26% But Not Lagging Market On Growth Or Pricing
- We Might See A Profit From CureVac N.V. (NASDAQ:CVAC) Soon