Sabra Health Care REIT, Inc.'s (NASDAQ:SBRA) Stock's Been Going Strong: Could Weak Financials Mean The Market Will Correct Its Share Price?

Sabra Health Care REIT (NASDAQ:SBRA) has had a great run on the share market with its stock up by a significant 15% 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. In this article, we decided to focus on Sabra Health Care REIT’s ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for Sabra Health Care REIT

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 Sabra Health Care REIT is:

1.3% = US$43m ÷ US$3.3b (Based on the trailing twelve months to June 2022).

The ‘return’ is the yearly profit. Another way to think of that is that for every $1 worth of equity, the company was able to earn $0.01 in profit.

What Is The Relationship Between ROE And 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 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.

Sabra Health Care REIT’s Earnings Growth And 1.3% ROE

As you can see, Sabra Health Care REIT’s ROE looks pretty weak. Even when compared to the industry average of 6.5%, the ROE figure is pretty disappointing. Given the circumstances, the significant decline in net income by 37% seen by Sabra Health Care REIT over the last five years is not surprising. We believe that there also might be other aspects that are negatively influencing the company’s earnings prospects. For instance, the company has a very high payout ratio, or is faced with competitive pressures.

However, when we compared Sabra Health Care REIT’s growth with the industry we found that while the company’s earnings have been shrinking, the industry has seen an earnings growth of 11% in the same period. This is quite worrisome.

past-earnings-growth

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock’s future looks promising or ominous. Is Sabra Health Care REIT fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Sabra Health Care REIT Using Its Retained Earnings Effectively?

Sabra Health Care REIT seems to be paying out most of its income as dividends judging by its three-year median payout ratio of 87% (meaning, the company retains only 13% of profits). However, this is typical for REITs as they are often required by law to distribute most of their earnings. So this probably explains the company’s shrinking earnings.

Moreover, Sabra Health Care REIT has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth. Upon studying the latest analysts’ consensus data, we found that the company is expected to keep paying out approximately 78% of its profits over the next three years. Still, forecasts suggest that Sabra Health Care REIT’s future ROE will rise to 6.0% even though the the company’s payout ratio is not expected to change by much.

Conclusion

In total, we would have a hard think before deciding on any investment action concerning Sabra Health Care REIT. 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. With that said, we studied the latest analyst forecasts and found that while the company has shrunk its earnings in the past, analysts expect its earnings to grow in the future. Are these analysts expectations based on the broad expectations for the industry, or on the company’s fundamentals? Click here to be taken to our analyst’s forecasts page for the company.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

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