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With its stock down 22% over the past three months, it is easy to disregard KB Home (NYSE:KBH). 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. Specifically, we decided to study KB Home's ROE in this article.
Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.
Check out our latest analysis for KB Home
How Do You Calculate Return On Equity?
Return on equity 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 KB Home is:
19% = US$602m ÷ US$3.1b (Based on the trailing twelve months to February 2022).
The 'return' is the yearly profit. Another way to think of that is that for every $1 worth of equity, the company was able to earn $0.19 in profit.
Why Is ROE Important For Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.
A Side By Side comparison of KB Home's Earnings Growth And 19% ROE
To begin with, KB Home seems to have a respectable ROE. Further, the company's ROE is similar to the industry average of 19%. Consequently, this likely laid the ground for the impressive net income growth of 32% seen over the past five years by KB Home. However, there could also be other drivers behind this growth. Such as - high earnings retention or an efficient management in place.
As a next step, we compared KB Home's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 24%.
Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about KB Home's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.