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NVR's (NYSE:NVR) stock was mostly flat over the past week. But since value is created over the longer term, it's worth studying the company's strong financials to see what the future could hold. Specifically, we decided to study NVR's ROE in this article.
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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
How Is ROE Calculated?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for NVR is:
32% = US$974m ÷ US$3.0b (Based on the trailing twelve months to March 2021).
The 'return' is the yearly profit. Another way to think of that is that for every $1 worth of equity, the company was able to earn $0.32 in profit.
Why Is ROE Important For 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. 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 NVR's Earnings Growth And 32% ROE
First thing first, we like that NVR has an impressive ROE. Second, a comparison with the average ROE reported by the industry of 19% also doesn't go unnoticed by us. Probably as a result of this, NVR was able to see a decent net income growth of 18% over the last five years.
Next, on comparing NVR's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 17% in the same period.
Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. What is NVR worth today? The intrinsic value infographic in our free research report helps visualize whether NVR is currently mispriced by the market.
Is NVR Using Its Retained Earnings Effectively?
In total, we are pretty happy with NVR's 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. On studying current analyst estimates, we found that analysts expect the company to continue its recent growth streak. 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.
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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