Declining Stock and Decent Financials: Is The Market Wrong About Invitation Homes Inc. (NYSE:INVH)?
With its stock down 12% over the past three months, it is easy to disregard Invitation Homes (NYSE:INVH). However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. In this article, we decided to focus on Invitation Homes' ROE.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Put another way, it reveals the company's success at turning shareholder investments into profits.
View our latest analysis for Invitation Homes
How Do You Calculate Return On Equity?
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 Invitation Homes is:
2.9% = US$298m ÷ US$10b (Based on the trailing twelve months to March 2022).
The 'return' is the amount earned after tax over the last twelve months. That means that for every $1 worth of shareholders' equity, the company generated $0.03 in profit.
What Is The Relationship Between ROE And 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 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.
Invitation Homes' Earnings Growth And 2.9% ROE
It is hard to argue that Invitation Homes' ROE is much good in and of itself. Even compared to the average industry ROE of 6.5%, the company's ROE is quite dismal. However, we we're pleasantly surprised to see that Invitation Homes grew its net income at a significant rate of 62% in the last five years. We reckon that there could be other factors at play here. Such as - high earnings retention or an efficient management in place.
We then compared Invitation Homes' 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 11% in the same period.
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). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is INVH fairly valued? This infographic on the company's intrinsic value has everything you need to know.
Is Invitation Homes Using Its Retained Earnings Effectively?
The three-year median payout ratio for Invitation Homes is 48%, which is moderately low. The company is retaining the remaining 52%. By the looks of it, the dividend is well covered and Invitation Homes is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.
Moreover, Invitation Homes is determined to keep sharing its profits with shareholders which we infer from its long history of five years of paying a dividend. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 55%. However, Invitation Homes' ROE is predicted to rise to 4.7% despite there being no anticipated change in its payout ratio.
Conclusion
On the whole, we do feel that Invitation Homes has some positive attributes. With a high rate of reinvestment, albeit at a low ROE, the company has managed to see a considerable growth in its earnings. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. 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.
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