Does the market follow the rules?

Shares of PulteGroup (NYSE:PHM) are up a significant 37% over the last three months. Given that the market rewards good financial performance over the long term, we wonder if that’s the case here. In this article, we decided to focus on PulteGroup’s ROE.

Return on equity, or ROE, is a key measure used to assess the effectiveness of a company’s capital use by company management. In other words, it shows the company’s success in converting shareholder investments into profits.

Check out our latest analysis for PulteGroup

How to calculate return on equity?

The return on equity formula Is:

Return on equity = Net profit (from continuing operations) ÷ Shareholders’ equity

So, based on the above formula, the ROE for PulteGroup is:

25% = US$2.8B ÷ US$11B (Based on the trailing twelve months to June 2024).

“Return” refers to the company’s profits for the last year. One way to think about it is this: For every dollar of shareholder equity a company has, it earns $0.25.

Why is ROE important for profit growth?

We have already established that ROE serves as an effective profit-generating measure for a company’s future earnings. We now need to assess how much of the profits the company reinvests or “retains” for future growth, which gives us an idea of ​​the company’s growth potential. Assuming everything else remains unchanged, the higher the ROE and earnings retention, the higher the growth rate of a company compared to companies that do not necessarily possess these characteristics.

Increase in PulteGroup profits and 25% ROE

First, we acknowledge that PulteGroup has a significantly high ROE. Additionally, the company’s ROE is higher compared to the industry average of 15%, which is quite remarkable. As a result, PulteGroup’s exceptional 23% net profit growth over the last five years is no surprise.

Then, when we compared PulteGroup’s net income growth with the industry, we found that the company’s reported growth is similar to the industry’s average growth rate of 22% over the last few years.

Earnings growth is an important factor influencing share valuation. Investors then need to determine whether the expected earnings growth, or lack thereof, is already built into the stock price. This then helps them determine whether the stock is destined for a bright or bleak future. Is PHM fairly valued? Find out everything you need to know in this infographic on company intrinsic value.

Is PulteGroup using its retained earnings effectively?

PulteGroup’s median shareholder payout ratio over three years is 5.8%, which is quite low. This means that the company retains 94% of its profits. This suggests that management is reinvesting most of the profits into growing the company, as evidenced by the growth the company is seeing.

The story continues

Additionally, PulteGroup pays dividends for at least ten years, which means the company takes sharing its profits with shareholders quite seriously. Our latest analyst data shows that the company’s future payout rate over the next three years will be approximately 5.7%. As a result, PulteGroup’s ROE is not expected to change significantly, which we inferred from analyst estimates of 21% for future ROE.

Abstract

Overall, we think PulteGroup’s performance was quite good. We especially like the fact that the company is reinvesting heavily in its business and achieving a high rate of return. Not surprisingly, this led to impressive profit growth. Therefore, according to the latest forecasts of industry analysts, the company’s profits are expected to decline in the future. Are analysts’ expectations based on broad expectations for the industry or on the company’s fundamentals? Click here to go to our analysts’ forecasts for the company.

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This article by Simply Wall St is of a general nature. We comment based on historical data and analyst forecasts, using only an unbiased methodology, and our articles are not intended to provide financial advice. It is not a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide long-term, focused analysis based on fundamental data. Please note that our analysis may not reflect the latest price-sensitive company announcements or qualitative content. Simply Wall St has no position in any of the stocks mentioned.