Are Strong Financial Prospects The Force That Is Driving The Momentum In Beazer Homes USA, Inc.’s NYSE:BZH) Stock?
Beazer Homes USA (NYSE:BZH) has had a great run on the share market with its stock up by a significant 28% over the last three months. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. In this article, we decided to focus on Beazer Homes USA’s ROE.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Put another way, it reveals the company’s success at turning shareholder investments into profits.
Check out our latest analysis for Beazer Homes USA
How Do You Calculate Return On Equity?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity
So, based on the above formula, the ROE for Beazer Homes USA is:
14% = US$159m ÷ US$1.1b (Based on the trailing twelve months to September 2023).
The ‘return’ is the yearly profit. That means that for every $1 worth of shareholders’ equity, the company generated $0.14 in profit.
What Is The Relationship Between ROE And Earnings Growth?
So far, we’ve learned that ROE is a measure of a company’s profitability. Depending on how much of these profits the company reinvests or “retains”, and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.
Beazer Homes USA’s Earnings Growth And 14% ROE
At first glance, Beazer Homes USA seems to have a decent ROE. And on comparing with the industry, we found that the the average industry ROE is similar at 16%. This certainly adds some context to Beazer Homes USA’s exceptional 50% net income growth seen over the past five years. We believe that there might also be other aspects that are positively influencing the company’s earnings growth. 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 Beazer Homes USA’s growth is quite high when compared to the industry average growth of 29% 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. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock’s future looks promising or ominous. If you’re wondering about Beazer Homes USA’s’s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Beazer Homes USA Efficiently Re-investing Its Profits?
Given that Beazer Homes USA doesn’t pay any dividend to its shareholders, we infer that the company has been reinvesting all of its profits to grow its business.
Conclusion
On the whole, we feel that Beazer Homes USA’s performance has been quite good. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. Having said that, the company’s earnings growth is expected to slow down, as forecasted in the current analyst estimates. 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.
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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.
