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Most readers would already be aware that KB Home's (NYSE:KBH) stock increased significantly by 6.1% over the past month. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. In this article, we decided to focus on KB Home's ROE.
ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
Check out our latest analysis for KB Home
How Is ROE Calculated?
ROE 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:
15% = US$615m ÷ US$4.0b (Based on the trailing twelve months to August 2024).
The 'return' refers to a company's earnings over the last year. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.15.
Why Is ROE Important For Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. 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.
KB Home's Earnings Growth And 15% ROE
At first glance, KB Home seems to have a decent ROE. Further, the company's ROE is similar to the industry average of 15%. Consequently, this likely laid the ground for the decent growth of 19% seen over the past five years by KB Home.
As a next step, we compared KB Home's 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 19% in the same period.
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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. 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.
Is KB Home Making Efficient Use Of Its Profits?
KB Home's three-year median payout ratio to shareholders is 9.0% (implying that it retains 91% of its income), which is on the lower side, so it seems like the management is reinvesting profits heavily to grow its business.