Kforce Inc.'s (NASDAQ:KFRC) Stock Has Fared Decently: Is the Market Following Strong Financials?
Kforce's (NASDAQ:KFRC) stock up by 4.7% over the past month. Since the market usually pay for a company’s long-term financial health, we decided to study the company’s fundamentals to see if they could be influencing the market. In this article, we decided to focus on Kforce's ROE.
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. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
View our latest analysis for Kforce
How Do You Calculate Return On Equity?
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 Kforce is:
39% = US$72m ÷ US$186m (Based on the trailing twelve months to March 2023).
The 'return' is the yearly profit. That means that for every $1 worth of shareholders' equity, the company generated $0.39 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. 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. 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.
Kforce's Earnings Growth And 39% ROE
Firstly, we acknowledge that Kforce has a significantly high ROE. Additionally, the company's ROE is higher compared to the industry average of 16% which is quite remarkable. This probably laid the groundwork for Kforce's moderate 15% net income growth seen over the past five years.
Next, on comparing Kforce's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 14% over the last few years.
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. What is KFRC worth today? The intrinsic value infographic in our free research report helps visualize whether KFRC is currently mispriced by the market.
Is Kforce Using Its Retained Earnings Effectively?
Kforce has a three-year median payout ratio of 29%, which implies that it retains the remaining 71% of its profits. This suggests that its dividend is well covered, and given the decent growth seen by the company, it looks like management is reinvesting its earnings efficiently.
Moreover, Kforce is determined to keep sharing its profits with shareholders which we infer from its long history of nine years of paying a dividend.
Conclusion
Overall, we are quite pleased with Kforce'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. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.
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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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