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It is hard to get excited after looking at Green Brick Partners' (NYSE:GRBK) recent performance, when its stock has declined 14% over the past three months. But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. In this article, we decided to focus on Green Brick Partners' ROE.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.
View our latest analysis for Green Brick Partners
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 Green Brick Partners is:
22% = US$204m ÷ US$911m (Based on the trailing twelve months to December 2021).
The 'return' is the profit over the last twelve months. One way to conceptualize this is that for each $1 of shareholders' capital it has, the company made $0.22 in profit.
What Is The Relationship Between ROE And Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.
A Side By Side comparison of Green Brick Partners' Earnings Growth And 22% ROE
Firstly, we acknowledge that Green Brick Partners has a significantly high ROE. Further, even comparing with the industry average if 20%, the company's ROE is quite respectable. As a result, Green Brick Partners' remarkable 43% net income growth seen over the past 5 years is likely aided by its high ROE.
Next, on comparing with the industry net income growth, we found that Green Brick Partners' growth is quite high when compared to the industry average growth of 22% in the same period, which is great to see.
Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. Is Green Brick Partners fairly valued compared to other companies? These 3 valuation measures might help you decide.