Is Harvey Norman Holdings Limited's (ASX:HVN) Latest Stock Performance A Reflection Of Its Financial Health?
Most readers would already be aware that Harvey Norman Holdings' (ASX:HVN) stock increased significantly by 17% over the past three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Particularly, we will be paying attention to Harvey Norman Holdings' ROE today.
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.
See our latest analysis for Harvey Norman Holdings
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 Harvey Norman Holdings is:
14% = AU$486m ÷ AU$3.5b (Based on the trailing twelve months to June 2020).
The 'return' is the profit over the last twelve months. One way to conceptualize this is that for each A$1 of shareholders' capital it has, the company made A$0.14 in profit.
Why Is ROE Important For Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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. 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.
A Side By Side comparison of Harvey Norman Holdings' Earnings Growth And 14% ROE
At first glance, Harvey Norman Holdings seems to have a decent ROE. Further, the company's ROE compares quite favorably to the industry average of 6.6%. This certainly adds some context to Harvey Norman Holdings' decent 6.1% net income growth seen over the past five years.
Next, on comparing with the industry net income growth, we found that Harvey Norman Holdings' growth is quite high when compared to the industry average growth of 0.1% in the same period, which is great to see.
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). Doing so will help them establish if the stock's future looks promising or ominous. What is HVN worth today? The intrinsic value infographic in our free research report helps visualize whether HVN is currently mispriced by the market.
Is Harvey Norman Holdings Making Efficient Use Of Its Profits?
Harvey Norman Holdings has a significant three-year median payout ratio of 78%, meaning that it is left with only 22% to reinvest into its business. This implies that the company has been able to achieve decent earnings growth despite returning most of its profits to shareholders.
Besides, Harvey Norman Holdings 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 over the next three years is expected to be approximately 79%. As a result, Harvey Norman Holdings' ROE is not expected to change by much either, which we inferred from the analyst estimate of 12% for future ROE.
Summary
Overall, we are quite pleased with Harvey Norman Holdings' performance. Especially the high ROE, Which has contributed to the impressive growth seen in earnings. Despite the company reinvesting only a small portion of its profits, it still has managed to grow its earnings so that is appreciable. 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 latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.
This article by Simply Wall St is general in nature. 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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