With its stock down 8.2% over the past month, it is easy to disregard Lennar (NYSE:LEN). 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 Lennar'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. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

How Is ROE Calculated?

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 Lennar is:

15% = US$4.2b ÷ US$28b (Based on the trailing twelve months to August 2024).

The 'return' is the income the business earned over the last year. That means that for every $1 worth of shareholders' equity, the company generated $0.15 in profit.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company's earnings growth potential. 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.

Lennar's Earnings Growth And 15% ROE

To begin with, Lennar seems to have a respectable ROE. Further, the company's ROE is similar to the industry average of 15%. This probably goes some way in explaining Lennar's moderate 15% growth over the past five years amongst other factors.

Next, on comparing with the industry net income growth, we found that Lennar's reported growth was lower than the industry growth of 19% over the last few years, which is not something we like to see.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It's important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. Is LEN fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Lennar Efficiently Re-investing Its Profits?

In Lennar's case, its respectable earnings growth can probably be explained by its low three-year median payout ratio of 9.5% (or a retention ratio of 90%), which suggests that the company is investing most of its profits to grow its business.

Moreover, Lennar is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 11%. Accordingly, forecasts suggest that Lennar's future ROE will be 15% which is again, similar to the current ROE.

Conclusion

In total, we are pretty happy with Lennar's performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see a good amount of growth in its earnings. 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.

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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.