In This Article:
With its stock down 5.4% over the past three months, it is easy to disregard Taylor Wimpey (LON:TW.). But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. In this article, we decided to focus on Taylor Wimpey's ROE.
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. Put another way, it reveals the company's success at turning shareholder investments into profits.
See our latest analysis for Taylor Wimpey
How To Calculate Return On Equity?
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 Taylor Wimpey is:
12% = UK£559m ÷ UK£4.5b (Based on the trailing twelve months to July 2023).
The 'return' is the income the business earned over the last year. Another way to think of that is that for every £1 worth of equity, the company was able to earn £0.12 in profit.
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. 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.
Taylor Wimpey's Earnings Growth And 12% ROE
To begin with, Taylor Wimpey seems to have a respectable ROE. And on comparing with the industry, we found that the the average industry ROE is similar at 11%. As you might expect, the 2.7% net income decline reported by Taylor Wimpey is a bit of a surprise. So, there might be some other aspects that could explain this. Such as, the company pays out a huge portion of its earnings as dividends, or is faced with competitive pressures.
We then compared Taylor Wimpey's performance with the industry and found that the company has shrunk its earnings at a slower rate than the industry earnings which has seen its earnings shrink by 4.5% in the same 5-year period. This does appease the negative sentiment around the company to a certain extent.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. If you're wondering about Taylor Wimpey's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.