Declining Stock and Solid Fundamentals: Is The Market Wrong About Haverty Furniture Companies, Inc. (NYSE:HVT)?
Haverty Furniture Companies (NYSE:HVT) has had a rough month with its share price down 6.0%. But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. Particularly, we will be paying attention to Haverty Furniture Companies' 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. Put another way, it reveals the company's success at turning shareholder investments into profits.
View our latest analysis for Haverty Furniture Companies
How Is ROE Calculated?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Haverty Furniture Companies is:
34% = US$90m ÷ US$267m (Based on the trailing twelve months to June 2022).
The 'return' is the profit over the last twelve months. That means that for every $1 worth of shareholders' equity, the company generated $0.34 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.
A Side By Side comparison of Haverty Furniture Companies' Earnings Growth And 34% ROE
To begin with, Haverty Furniture Companies has a pretty high ROE which is interesting. Further, even comparing with the industry average if 30%, the company's ROE is quite respectable. Therefore, it might not be wrong to say that the impressive five year 34% net income growth seen by Haverty Furniture Companies was probably achieved as a result of the high ROE.
We then performed a comparison between Haverty Furniture Companies' net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 31% in the same period.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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 Haverty Furniture Companies fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is Haverty Furniture Companies Efficiently Re-investing Its Profits?
Haverty Furniture Companies' ' three-year median payout ratio is on the lower side at 24% implying that it is retaining a higher percentage (76%) of its profits. So it looks like Haverty Furniture Companies is reinvesting profits heavily to grow its business, which shows in its earnings growth.
Additionally, Haverty Furniture Companies has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders.
Conclusion
In total, we are pretty happy with Haverty Furniture Companies' 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. Having said that, on studying current analyst estimates, we were concerned to see that while the company has grown its earnings in the past, analysts expect its earnings to shrink in the future. 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.
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