It is hard to get excited after looking at Essential Properties Realty Trust's (NYSE:EPRT) recent performance, when its stock has declined 1.7% over the past month. 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. In this article, we decided to focus on Essential Properties Realty Trust's ROE.

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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

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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 Essential Properties Realty Trust is:

5.6% = US$213m ÷ US$3.8b (Based on the trailing twelve months to March 2025).

The 'return' is the yearly profit. That means that for every $1 worth of shareholders' equity, the company generated $0.06 in profit.

View our latest analysis for Essential Properties Realty Trust

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

A Side By Side comparison of Essential Properties Realty Trust's Earnings Growth And 5.6% ROE

At first glance, Essential Properties Realty Trust's ROE doesn't look very promising. However, its ROE is similar to the industry average of 5.3%, so we won't completely dismiss the company. Looking at Essential Properties Realty Trust's exceptional 31% five-year net income growth in particular, we are definitely impressed. 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. For instance, the company has a low payout ratio or is being managed efficiently.

Next, on comparing with the industry net income growth, we found that Essential Properties Realty Trust's growth is quite high when compared to the industry average growth of 13% in the same period, which is great to see.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about Essential Properties Realty Trust's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Essential Properties Realty Trust Making Efficient Use Of Its Profits?

Essential Properties Realty Trust has a very high three-year median payout ratio of 64%. This means that it has only 36% of its income left to reinvest into its business. However, it's not unusual to see a REIT with such a high payout ratio mainly due to statutory requirements. Despite this, the company's earnings have grown significantly as we saw above.

Moreover, Essential Properties Realty Trust is determined to keep sharing its profits with shareholders which we infer from its long history of seven years of paying a dividend. Looking at the current analyst consensus data, we can see that the company's future payout ratio is expected to rise to 92% over the next three years. Regardless, the future ROE for Essential Properties Realty Trust is speculated to rise to 6.7% despite the anticipated increase in the payout ratio. There could probably be other factors that could be driving the future growth in the ROE.

Conclusion

On the whole, we do feel that Essential Properties Realty Trust has some positive attributes. 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. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts 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.