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Is Invitation Homes Inc.'s (NYSE:INVH) Recent Stock Performance Influenced By Its Fundamentals In Any Way?

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Invitation Homes' (NYSE:INVH) stock is up by a considerable 29% over the past three months. As most would know, fundamentals are what usually guide market price movements over the long-term, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. In this article, we decided to focus on Invitation Homes' ROE.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

View our latest analysis for Invitation Homes

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 Invitation Homes is:

2.4% = US$205m ÷ US$8.6b (Based on the trailing twelve months to March 2021).

The 'return' is the yearly profit. One way to conceptualize this is that for each $1 of shareholders' capital it has, the company made $0.02 in profit.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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. 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.

A Side By Side comparison of Invitation Homes' Earnings Growth And 2.4% ROE

As you can see, Invitation Homes' ROE looks pretty weak. Even compared to the average industry ROE of 5.1%, 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 67% in the last five years. We believe that there might be other aspects that are positively influencing the company's earnings growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

As a next step, we compared Invitation Homes' net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 10.0%.

past-earnings-growth
past-earnings-growth

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about Invitation Homes''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Invitation Homes Making Efficient Use Of Its Profits?

Invitation Homes' three-year median payout ratio is a pretty moderate 47%, meaning the company retains 53% of its income. 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 four years of paying a dividend. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 48%. As a result, Invitation Homes' ROE is not expected to change by much either, which we inferred from the analyst estimate of 2.8% for future ROE.

Summary

On the whole, we do feel that Invitation Homes has some positive attributes. Despite its low rate of return, the fact that the company reinvests a very high portion of its profits into its business, no doubt contributed to its high earnings growth. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. 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.

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.

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