Yahoo Finance Will Weakness in Meritage Homes Corporation's (NYSE:MTH) Stock Prove Temporary Given Strong Fundamentals?
With its stock down 5.3% over the past three months, it is easy to disregard Meritage Homes (NYSE:MTH). 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 Meritage Homes' ROE in this article.
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. Put another way, it reveals the company's success at turning shareholder investments into profits.
See our latest analysis for Meritage Homes
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 Meritage Homes is:
16% = US$739m ÷ US$4.6b (Based on the trailing twelve months to December 2023).
The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every $1 worth of equity, the company was able to earn $0.16 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. 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 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.
Meritage Homes' Earnings Growth And 16% ROE
To start with, Meritage Homes' ROE looks acceptable. And on comparing with the industry, we found that the the average industry ROE is similar at 16%. This certainly adds some context to Meritage Homes' exceptional 30% net income growth seen over the past five years. However, there could also be other drivers behind this growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.
As a next step, we compared Meritage Homes' 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 25% in the same period.
Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Meritage Homes''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Meritage Homes Using Its Retained Earnings Effectively?
Meritage Homes has a really low three-year median payout ratio of 3.0%, meaning that it has the remaining 97% left over to reinvest into its business. So it looks like Meritage Homes is reinvesting profits heavily to grow its business, which shows in its earnings growth.
Along with seeing a growth in earnings, Meritage Homes only recently started paying dividends. Its quite possible that the company was looking to impress its shareholders. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to rise to 16% over the next three years. Regardless, the ROE is not expected to change much for the company despite the higher expected payout ratio.
Summary
Overall, we are quite pleased with Meritage Homes' performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
