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With its stock down 11% over the past month, it is easy to disregard Haverty Furniture Companies (NYSE:HVT). However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Particularly, we will be paying attention to Haverty Furniture Companies' ROE today.
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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.
See our latest analysis for Haverty Furniture Companies
How Is ROE Calculated?
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 Haverty Furniture Companies is:
24% = US$72m ÷ US$306m (Based on the trailing twelve months to June 2023).
The 'return' is the amount earned after tax over the last twelve months. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.24.
What Is The Relationship Between ROE And Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.
A Side By Side comparison of Haverty Furniture Companies' Earnings Growth And 24% ROE
First thing first, we like that Haverty Furniture Companies has an impressive ROE. Additionally, the company's ROE is higher compared to the industry average of 20% which is quite remarkable. So, the substantial 30% net income growth seen by Haverty Furniture Companies over the past five years isn't overly surprising.
As a next step, we compared Haverty Furniture Companies' net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 26% in the same period.
Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Haverty Furniture Companies''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.