Ethan Allen Interiors Inc.'s (NYSE:ETD) Stock's On An Uptrend: Are Strong Financials Guiding The Market?
Ethan Allen Interiors (NYSE:ETD) has had a great run on the share market with its stock up by a significant 16% over the last month. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. In this article, we decided to focus on Ethan Allen Interiors' ROE.
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.
Check out our latest analysis for Ethan Allen Interiors
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 Ethan Allen Interiors is:
20% = US$91m ÷ US$463m (Based on the trailing twelve months to September 2023).
The 'return' is the income the business earned over the last year. Another way to think of that is that for every $1 worth of equity, the company was able to earn $0.20 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. 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. 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.
Ethan Allen Interiors' Earnings Growth And 20% ROE
To begin with, Ethan Allen Interiors seems to have a respectable ROE. Especially when compared to the industry average of 16% the company's ROE looks pretty impressive. Probably as a result of this, Ethan Allen Interiors was able to see an impressive net income growth of 35% over the last five years. However, there could also be other causes behind this growth. Such as - high earnings retention or an efficient management in place.
We then compared Ethan Allen Interiors' 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 29% in the same 5-year period.
Earnings growth is a huge factor in stock valuation. 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. What is ETD worth today? The intrinsic value infographic in our free research report helps visualize whether ETD is currently mispriced by the market.
Is Ethan Allen Interiors Efficiently Re-investing Its Profits?
Ethan Allen Interiors' three-year median payout ratio is a pretty moderate 38%, meaning the company retains 62% of its income. So it seems that Ethan Allen Interiors is reinvesting efficiently in a way that it sees impressive growth in its earnings (discussed above) and pays a dividend that's well covered.
Moreover, Ethan Allen Interiors 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.
Summary
Overall, we are quite pleased with Ethan Allen Interiors' 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.
