Most readers would already be aware that Century Communities' (NYSE:CCS) stock increased significantly by 29% over the past three months. Since the market usually pay for a company's long-term fundamentals, we decided to study the company's key performance indicators to see if they could be influencing the market. Particularly, we will be paying attention to Century Communities' ROE today.
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. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.
How Is ROE Calculated?
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 Century Communities is:
13% = US$323m ÷ US$2.5b (Based on the trailing twelve months to June 2024).
The 'return' is the profit over the last twelve months. That means that for every $1 worth of shareholders' equity, the company generated $0.13 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. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.
Century Communities' Earnings Growth And 13% ROE
At first glance, Century Communities seems to have a decent ROE. And on comparing with the industry, we found that the the average industry ROE is similar at 15%. This certainly adds some context to Century Communities' moderate 19% net income growth seen over the past five years.
As a next step, we compared Century Communities' 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 22% in the same 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. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Century Communities''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Century Communities Efficiently Re-investing Its Profits?
Century Communities' three-year median payout ratio to shareholders is 5.0% (implying that it retains 95% of its income), which is on the lower side, so it seems like the management is reinvesting profits heavily to grow its business.
Moreover, Century Communities is determined to keep sharing its profits with shareholders which we infer from its long history of three years of paying a dividend.
Conclusion
In total, we are pretty happy with Century Communities' performance. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. 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.
