VICI Properties (NYSE:VICI) has had a rough three months with its share price down 2.2{6076a8df91bdf184aec6ec8d55e2cabc0b8c0345d5e830fb5a1c8c388976da2c}. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Particularly, we will be paying attention to VICI Properties’ ROE today.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In simpler terms, it measures the profitability of a company in relation to shareholder’s equity.

Check out our latest analysis for VICI Properties

How To Calculate Return On Equity?

ROE 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 VICI Properties is:

13{6076a8df91bdf184aec6ec8d55e2cabc0b8c0345d5e830fb5a1c8c388976da2c} = US$1.3b ÷ US$9.7b (Based on the trailing twelve months to June 2021).

The ‘return’ is the income the business earned over the last year. One way to conceptualize this is that for each $1 of shareholders’ capital it has, the company made $0.13 in profit.

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company’s future earnings. We now need to evaluate how much profit the company reinvests or “retains” for future growth which then gives us an idea about the growth potential of the company. 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.

VICI Properties’ Earnings Growth And 13{6076a8df91bdf184aec6ec8d55e2cabc0b8c0345d5e830fb5a1c8c388976da2c} ROE

To start with, VICI Properties’ ROE looks acceptable. Further, the company’s ROE compares quite favorably to the industry average of 5.1{6076a8df91bdf184aec6ec8d55e2cabc0b8c0345d5e830fb5a1c8c388976da2c}. This certainly adds some context to VICI Properties’ exceptional 55{6076a8df91bdf184aec6ec8d55e2cabc0b8c0345d5e830fb5a1c8c388976da2c} net income growth seen over the past five years. We reckon that there could also be other factors at play here. For example, it is possible that the company’s management has made some good strategic decisions, or that the company has a low payout ratio.

Next, on comparing with the industry net income growth, we found that VICI Properties’ growth is quite high when compared to the industry average growth of 9.7{6076a8df91bdf184aec6ec8d55e2cabc0b8c0345d5e830fb5a1c8c388976da2c} in the same period, which is great to see.

past-earnings-growth

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company’s expected earnings growth (or decline). 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 VICI Properties is trading on a high P/E or a low P/E, relative to its industry.

Is VICI Properties Making Efficient Use Of Its Profits?

VICI Properties has a very high three-year median payout ratio of 78{6076a8df91bdf184aec6ec8d55e2cabc0b8c0345d5e830fb5a1c8c388976da2c}. This means that it has only 22{6076a8df91bdf184aec6ec8d55e2cabc0b8c0345d5e830fb5a1c8c388976da2c} 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.

Besides, VICI Properties has been paying dividends over a period of three years. This shows that the company is committed to sharing profits with its shareholders. Based on the latest analysts’ estimates, we found that the company’s future payout ratio over the next three years is expected to hold steady at 70{6076a8df91bdf184aec6ec8d55e2cabc0b8c0345d5e830fb5a1c8c388976da2c}. Therefore, the company’s future ROE is also not expected to change by much with analysts predicting an ROE of 11{6076a8df91bdf184aec6ec8d55e2cabc0b8c0345d5e830fb5a1c8c388976da2c}.

Conclusion

Overall, we are quite pleased with VICI Properties’ performance. In particular, its high ROE is quite noteworthy and also the probable explanation behind its considerable earnings growth. Yet, the company is retaining a small portion of its profits. Which means that the company has been able to grow its earnings in spite of it, so that’s not too bad. 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.

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.

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