D.R. Horton (NYSE:DHI) has had a rough three months with its share price down 25%. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Specifically, we decided to study D.R. Horton’s ROE in this article.
Return on equity or ROE is a key measure used to assess how efficiently a company’s management is utilizing the company’s capital. Put another way, it reveals the company’s success at turning shareholder investments into profits.
See our latest analysis for D.R. Horton
The formula for return on equity is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity
So, based on the above formula, the ROE for D.R. Horton is:
19% = US$4.8b ÷ US$26b (Based on the trailing twelve months to September 2024).
The ‘return’ is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each $1 of shareholders’ capital it has, the company made $0.19 in profit.
So far, we’ve learned that ROE is a measure of a company’s profitability. 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.
At first glance, D.R. Horton seems to have a decent ROE. Further, the company’s ROE is similar to the industry average of 16%. Consequently, this likely laid the ground for the decent growth of 19% seen over the past five years by D.R. Horton.
We then performed a comparison between D.R. Horton’s net income growth with the industry, which revealed that the company’s growth is similar to the average industry growth of 19% in the same 5-year 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. Has the market priced in the future outlook for DHI? You can find out in our latest intrinsic value infographic research report.
