Could the market be wrong about Eagle Materials Inc. (NYSE:EXP) given its attractive financial outlook?

It’s hard to get excited after looking at the recent performance of Eagle Materials (NYSE:EXP), as its stock is down 13% in the past month. 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 the ROE of Eagle Materials.

ROE or return on equity is a useful tool for evaluating how effectively a company can generate returns on the investment it has received from its shareholders. In other words, it reveals the company’s success in turning shareholders’ investments into profits.

Check out our latest analysis for Eagle Materials

How is ROE calculated?

ROE can be calculated using the formula:

Return on equity = Net income (from continuing operations) ÷ Equity

So, based on the above formula, the ROE for Eagle Materials is:

34% = $384 million ÷ $1.1 billion (based on trailing 12 months to June 2022).

“Yield” refers to a company’s earnings over the past year. This means that for every dollar of shareholders’ equity, the company generated $0.34 in profit.

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. Depending on how much of those earnings the company reinvests or “keeps”, and how efficiently it does so, we are then able to assess a company’s earnings 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.

Eagle Materials earnings growth and ROE of 34%

First, we recognize that Eagle Materials has a significantly high ROE. Second, a comparison to the average industry-reported ROE of 13% also does not go unnoticed by us. Probably because of this, Eagle Materials has been able to see a decent 14% net profit growth over the past five years.

Then, when comparing with the sector’s net income growth, we found that Eagle Materials’ reported growth was lower than the sector’s growth of 19% over the same period, which we don’t like to see.

NYSE:EXP Past Earnings Growth September 22, 2022

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 then helps them determine if the stock is positioned for a bright or bleak future. If you’re wondering about the valuation of Eagle Materials, check out this indicator of its price-earnings ratio, relative to its sector.

Does Eagle Materials use its profits efficiently?

In the case of Eagle Materials, its respectable earnings growth is likely due to its low three-year median payout ratio of 7.9% (or a retention rate of 92%), suggesting that the company invests most of its profits to grow its business.

Also, Eagle Materials has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. After reviewing the latest analyst consensus data, we found that the company is expected to continue to pay out around 8.5% of its earnings over the next three years. Still, forecasts suggest Eagle Materials’ future ROE will drop to 24%, even though the company’s payout ratio isn’t expected to change much.

Conclusion

Overall, we’re pretty happy with Eagle Materials’ performance. Specifically, we like that the company reinvests a large portion of its earnings at a high rate of return. This of course led the company to see good growth in profits. That said, the company’s earnings growth is expected to slow, as expected in current analyst estimates. Are these analyst expectations based on general industry expectations or company fundamentals? Click here to access our analyst forecast page for the company.

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.

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