American Homes 4 Rent’s (NYSE:AMH) stock is up by 3.9% over the past month. As most would know, long-term fundamentals have a strong correlation with market price movements, so we decided to look at the company’s key financial indicators today to determine if they have any role to play in the recent price movement. Particularly, we will be paying attention to American Homes 4 Rent’s ROE today.
Return on equity or ROE is a key measure used to assess how efficiently a company’s management is utilizing the company’s capital. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
Check out our latest analysis for American Homes 4 Rent
How To Calculate Return On Equity?
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 American Homes 4 Rent is:
3.0% = US$195m ÷ US$6.6b (Based on the trailing twelve months to September 2021).
The ‘return’ is the profit over the last twelve months. Another way to think of that is that for every $1 worth of equity, the company was able to earn $0.03 in profit.
What Has ROE Got To Do With Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company’s future earnings. 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.
American Homes 4 Rent’s Earnings Growth And 3.0% ROE
It is quite clear that American Homes 4 Rent’s ROE is rather low. Even compared to the average industry ROE of 6.2%, the company’s ROE is quite dismal. In spite of this, American Homes 4 Rent was able to grow its net income considerably, at a rate of 62% in the last five years. We believe that there might be other aspects that are positively influencing the company’s earnings 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.
We then compared American Homes 4 Rent’s net income growth with the industry and we’re pleased to see that the company’s growth figure is higher when compared with the industry which has a growth rate of 9.2% in the same period.
NYSE:AMH Past Earnings Growth November 9th 2021
Earnings growth is an important metric to consider when valuing a stock. 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. Is American Homes 4 Rent fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is American Homes 4 Rent Efficiently Re-investing Its Profits?
The three-year median payout ratio for American Homes 4 Rent is 33%, which is moderately low. The company is retaining the remaining 67%. By the looks of it, the dividend is well covered and American Homes 4 Rent is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.
Besides, American Homes 4 Rent has been paying dividends over a period of eight years. This shows that the company is committed to sharing profits with its shareholders. Upon studying the latest analysts’ consensus data, we found that the company is expected to keep paying out approximately 29% of its profits over the next three years. Therefore, the company’s future ROE is also not expected to change by much with analysts predicting an ROE of 3.0%.
On the whole, we do feel that American Homes 4 Rent has some positive attributes. Even in spite of the low rate of return, the company has posted impressive earnings growth as a result of reinvesting heavily into its business. Having said that, the company’s earnings growth is expected to slow down, as forecasted in the current analyst estimates. To know more about the company’s future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.
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.
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