Could the market be wrong about DR Horton, Inc. (NYSE: DHI) given its attractive financial outlook?
DR Horton Inc (NYSE:DHI) had a tough three months with a 20% drop in its stock price. However, stock prices are usually determined by a company’s long-term financial performance, which in this case looks quite promising. In this article, we decided to focus on DR Horton’s ROE.
Return on Equity or ROE is a test of how effectively a company increases its value and manages investors’ money. In simple terms, it is used to assess the profitability of a company in relation to its equity.
See our latest analysis for DR Horton
How to calculate return on equity?
the ROE formula East:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE for DR Horton is:
28% = US$4.5 billion ÷ US$16 billion (based on trailing 12 months to December 2021).
“Yield” is the income the business has earned over the past year. This therefore means that for each dollar of investment by its shareholder, the company generates a profit of $0.28.
Why is ROE important for earnings growth?
We have already established that ROE serves as an effective profit-generating indicator for a company’s future earnings. We now need to assess how much profit the company is reinvesting or “retaining” for future growth, which then gives us an idea of the company’s growth potential. Generally speaking, all things being equal, companies with high return on equity and earnings retention have a higher growth rate than companies that do not share these attributes.
DR Horton earnings growth and ROE of 28%
For starters, DR Horton has a pretty high ROE, which is interesting. Second, a comparison to the average industry-reported ROE of 19% also does not go unnoticed by us. Therefore, DR Horton’s exceptional 32% growth in net income over the past five years comes as no surprise.
We then compared DR Horton’s net income growth with the industry and we are pleased to see that the company’s growth figure is higher compared to the industry which has a 24% growth rate in during the same period.
Earnings growth is an important metric to consider when evaluating a stock. It is important for an investor to know whether the market has priced in the expected growth (or decline) in the company’s earnings. This will help them determine if the future of the title looks bright or ominous. A 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 outlook. Thus, you might want to check whether DR Horton is trading on a high P/E or on a low P/E, relative to its industry.
Does DR Horton effectively reinvest its profits?
DR Horton’s three-year median payout ratio to shareholders is 12%, which is quite low. This implies that the company retains 88% of its profits. So it looks like DR Horton is massively reinvesting its earnings to grow its business, which is reflected in its earnings growth.
Additionally, DR Horton has paid dividends over a period of at least ten years, which means the company is pretty serious about sharing its profits with shareholders. Our latest analyst data shows that the company’s future payout ratio is expected to drop to 5.8% over the next three years. However, the company’s ROE is not expected to change much despite the lower expected payout ratio.
All in all, we are quite satisfied with the performance of DR Horton. In particular, it is good to see that the company is investing heavily in its business, and together with a high rate of return, this has led to significant growth in its profits. That said, a study of the latest analyst forecasts shows that the company should see a slowdown in future earnings growth. Are these analyst expectations based on general industry expectations or company fundamentals? Click here to access our analyst forecast page for the company.
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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.