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With its stock down 9.2% over the past month, it is easy to disregard PulteGroup (NYSE:PHM). 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. In this article, we decided to focus on PulteGroup's ROE.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
See our latest analysis for PulteGroup
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 PulteGroup is:
25% = US$2.6b ÷ US$10b (Based on the trailing twelve months to December 2023).
The 'return' is the income the business earned over the last year. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.25.
What Is The Relationship Between ROE And 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. 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.
PulteGroup's Earnings Growth And 25% ROE
To begin with, PulteGroup has a pretty high ROE which is interesting. Second, a comparison with the average ROE reported by the industry of 16% also doesn't go unnoticed by us. As a result, PulteGroup's exceptional 25% net income growth seen over the past five years, doesn't come as a surprise.
Next, on comparing PulteGroup's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 25% over the last few years.
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). Doing so will help them establish if the stock's future looks promising or ominous. Has the market priced in the future outlook for PHM? You can find out in our latest intrinsic value infographic research report.
Is PulteGroup Using Its Retained Earnings Effectively?
PulteGroup's three-year median payout ratio to shareholders is 6.5%, which is quite low. This implies that the company is retaining 94% of its profits. This suggests that the management is reinvesting most of the profits to grow the business as evidenced by the growth seen by the company.