Did EPR Properties (NYSE:EPR) use debt to achieve its 5.3% ROE?
Many investors are still learning the different metrics that can be helpful when analyzing a stock. This article is for those who want to know more about return on equity (ROE). To keep the lesson grounded in practicality, we’ll use ROE to better understand EPR (NYSE:EPR) properties.
Return on equity or ROE is a key metric used to gauge how effectively a company’s management is using the company’s capital. In simple terms, it is used to assess the profitability of a company in relation to its equity.
Check out our latest analysis for EPR Properties
How do you calculate return on equity?
Return on equity can be calculated using the formula:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE for EPR Properties is:
5.3% = $137 million ÷ $2.6 billion (based on trailing 12 months to March 2022).
“Yield” refers to a company’s earnings over the past year. This therefore means that for every $1 of investment by its shareholder, the company generates a profit of $0.05.
Does EPR Properties have a good return on equity?
A simple way to determine if a company has a good return on equity is to compare it to the average for its industry. The limitation of this approach is that some companies are quite different from others, even within the same industrial classification. The image below shows that EPR Properties has an ROE that is roughly in line with the REIT industry average (6.5%).
It’s not surprising, but it’s respectable. Although the ROE is similar to that of the industry, we still need to perform further checks to see if the company’s ROE is being boosted by high debt levels. If so, this increases its exposure to financial risk. To learn about the 3 risks we have identified for EPR Properties, visit our risk dashboard for free.
What is the impact of debt on ROE?
Most businesses need money – from somewhere – to increase their profits. The money for the investment can come from the previous year’s earnings (retained earnings), from issuing new shares or from borrowing. In the case of the first and second options, the ROE will reflect this use of cash, for growth. In the latter case, the use of debt will improve returns, but will not change equity. In this way, the use of debt will increase ROE, even though the core economics of the business remains the same.
Combine EPR Properties’ debt and its return on equity of 5.3%
It is worth noting the heavy use of debt by EPR Properties, leading to its debt-to-equity ratio of 1.08. Its ROE is quite low, even with the use of significant debt; this is not a good result, in our view. Debt increases risk and reduces options for the business in the future, so you generally want to see good returns using it.
Return on equity is a useful indicator of a company’s ability to generate profits and return them to shareholders. A company that can earn a high return on equity without going into debt could be considered a high quality company. If two companies have roughly the same level of debt and one has a higher ROE, I generally prefer the one with a higher ROE.
But ROE is only one piece of a larger puzzle, as high-quality companies often trade on high earnings multiples. It is important to consider other factors, such as future earnings growth and the amount of investment needed in the future. You might want to take a look at this data-rich interactive chart of the company’s forecast.
Sure, you might find a fantastic investment by looking elsewhere. So take a look at this free list of interesting companies.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.