U.S. markets closed
  • S&P Futures

    3,812.25
    -9.00 (-0.24%)
     
  • Dow Futures

    30,944.00
    -55.00 (-0.18%)
     
  • Nasdaq Futures

    11,660.00
    -31.00 (-0.27%)
     
  • Russell 2000 Futures

    1,717.40
    -4.00 (-0.23%)
     
  • Crude Oil

    110.21
    +0.43 (+0.39%)
     
  • Gold

    1,821.20
    +3.70 (+0.20%)
     
  • Silver

    20.74
    -0.00 (-0.01%)
     
  • EUR/USD

    1.0453
    +0.0009 (+0.08%)
     
  • 10-Yr Bond

    3.0930
    -0.1130 (-3.52%)
     
  • Vix

    28.16
    -0.20 (-0.71%)
     
  • GBP/USD

    1.2132
    +0.0010 (+0.08%)
     
  • USD/JPY

    136.6100
    +0.0650 (+0.05%)
     
  • BTC-USD

    20,065.55
    -292.01 (-1.43%)
     
  • CMC Crypto 200

    430.99
    -8.67 (-1.97%)
     
  • FTSE 100

    7,312.32
    -11.09 (-0.15%)
     
  • Nikkei 225

    26,561.05
    -243.55 (-0.91%)
     

Declining Stock and Solid Fundamentals: Is The Market Wrong About Lennar Corporation (NYSE:LEN)?

  • Oops!
    Something went wrong.
    Please try again later.
·4 min read
In this article:
  • Oops!
    Something went wrong.
    Please try again later.

With its stock down 27% over the past three months, 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 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 Lennar

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 Lennar is:

19% = US$3.9b ÷ US$21b (Based on the trailing twelve months to February 2022).

The 'return' is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each $1 of shareholders' capital it has, the company made $0.19 in profit.

What Is The Relationship Between ROE And 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. 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.

Lennar's Earnings Growth And 19% ROE

At first glance, Lennar seems to have a decent ROE. And on comparing with the industry, we found that the the average industry ROE is similar at 19%. This probably goes some way in explaining Lennar's significant 34% net income growth over the past five years amongst other factors. We reckon that there could also be other factors at play here. Such as - high earnings retention or an efficient management in place.

Next, on comparing with the industry net income growth, we found that Lennar's growth is quite high when compared to the industry average growth of 24% in the same period, which is great to see.

past-earnings-growth
past-earnings-growth

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Lennar's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Lennar Making Efficient Use Of Its Profits?

Lennar's ' three-year median payout ratio is on the lower side at 5.8% implying that it is retaining a higher percentage (94%) of its profits. This suggests that the management is reinvesting most of the profits to grow the business as evidenced by the growth seen by the company.

Besides, Lennar has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Our latest analyst data shows that the future payout ratio of the company is expected to rise to 8.9% over the next three years. Despite the higher expected payout ratio, the company's ROE is not expected to change by much.

Summary

In total, we are pretty happy with Lennar's performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.