It’s easy to ignore Welltower (NYSE:WELL) after its stock has fallen 7.8% over the past month. Since a company’s long-term performance usually drives market outcomes, we decided to examine the company’s financials to determine if the downtrend will continue. In this article, we chose to focus on his ROE for Welltower.
Return on equity or ROE is an important factor for shareholders to consider as it indicates how effectively capital is being reinvested. In other words, it shows that we have succeeded in turning shareholder investment into profit.
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How do you calculate return on equity?
ROE can be calculated using the following formula:
Return on Equity = Net Income (from Continuing Operations) ÷ Shareholders’ Equity
So, based on the formula above, Welltower’s ROE would be:
1.1% = US$225 million ÷ US$20 billion (based on the last 12 months to September 2022).
“Revenue” is the amount after tax for the last 12 months. So, this means that for every $1 a shareholder invests, the company generates his $0.01 profit.
What does ROE have to do with revenue growth?
So far, we’ve learned that ROE measures how efficiently a company generates profits. Depending on how much of these earnings a company reinvests or “retains” and how effectively it does so, a company’s potential for revenue growth can be assessed. All else being equal, companies with both high return on equity and high profit margins typically have higher growth rates compared to companies that do not have the same characteristics.
Welltower revenue growth and 1.1% ROE
It’s hard to argue that Welltower’s ROE itself is very good. Even compared to the industry average of his ROE of 6.9%, his ROE for the company is pretty low. So, it may not be wrong to say that Welltower’s five-year net profit decline of his 8.1% could be due to its low ROE. We believe there are other aspects that are also negatively impacting the company’s earnings prospects. and so on – low earnings retention or inadequate capital allocation.
So, as a next step, we compared Welltower’s performance to the industry and were disappointed to find that the industry was growing revenue at a rate of 12% over the same period while the company was shrinking revenue.
The foundation for adding value to a company is largely tied to revenue growth. It is important for investors to know whether the market is pricing in a company’s expected earnings growth (or decline). That way, you’ll know if your stock is headed for clear blue waters, or if wet waters await. What is his WELL worth today?The intrinsic value infographic in our free research report helps you visualize if WELL is currently being misvalued in the market.
Is Welltower making good use of retained earnings?
Welltower appears to be paying out most of its income in dividends, judging by its three-year median payout ratio of 90% (meaning the company only keeps 10% of its profits). However, this is typical of REITs, as they are often required by law to distribute most of their earnings. This could therefore explain why revenues are shrinking.
In addition, Welltower has paid dividends for at least ten years. That is, the company’s management decides to pay dividends even with little to no earnings growth. A study of the latest analyst consensus data found that the company’s future payout percentage is expected to rise to 125% over the next three years. However, Weltower’s future ROE is expected to rise to 6.0%, despite an expected increase in the company’s dividend payout ratio. We speculate that there may be other factors driving the expected growth of his ROE for the company.
All in all, be very cautious before making any decisions about Welltower. The company’s earnings growth has been disappointing as a result of its low ROE and poor reinvestment in the business. As such, the latest industry analyst forecasts show that analysts expect a significant improvement in the company’s revenue growth.Learn more about the company’s future revenue growth projections here freedom For more information, see the company’s analyst forecasts report.
What are the risks and opportunities well tower?
Traded 21.8% below estimated fair value
Revenue is projected to grow 40.47% annually
Interest payments not sufficiently covered by earnings
Shareholders have been diluted in the past year
Profitability (3.6%) is lower than last year (9.7%)
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This article by Simply Wall St is general in nature. We provide comments based on historical data and analyst projections using only unbiased methodologies and our articles are not intended as financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. We aim to deliver long-term focused analysis based on fundamental data. Please note that our analysis may not take into account the latest price-sensitive company announcements or qualitative materials. Is not …