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With An ROE Of 10.08%, Has MD.C. Holdings Inc.’s (NYSE:MDC) Management Done Well?

MD.C. Holdings Inc. (NYSE:MDC) generated a below-average return on equity of 10.08% in the past 12 months, while its industry returned 11.54%. An investor may attribute an inferior ROE to a relatively inefficient performance, and whilst this can often be the case, knowing the nuts and bolts of the ROE calculation may change that perspective and give you a deeper insight into MDC’s past performance. Metrics such as financial leverage can impact the level of ROE which in turn can affect the sustainability of MDC’s returns. Let me show you what I mean by this. See our latest analysis for M.D.C. Holdings

Breaking down ROE — the mother of all ratios

Return on Equity (ROE) weighs M.D.C. Holdings’s profit against the level of its shareholders’ equity. It essentially shows how much the company can generate in earnings given the amount of equity it has raised. Generally speaking, a higher ROE is preferred; however, there are other factors we must also consider before making any conclusions.

Return on Equity = Net Profit ÷ Shareholders Equity

Returns are usually compared to costs to measure the efficiency of capital. M.D.C. Holdings’s cost of equity is 13.21%. Given a discrepancy of -3.13% between return and cost, this indicated that M.D.C. Holdings may be paying more for its capital than what it’s generating in return. ROE can be dissected into three distinct ratios: net profit margin, asset turnover, and financial leverage. This is called the Dupont Formula:

Dupont Formula

ROE = profit margin × asset turnover × financial leverage

ROE = (annual net profit ÷ sales) × (sales ÷ assets) × (assets ÷ shareholders’ equity)

ROE = annual net profit ÷ shareholders’ equity

NYSE:MDC Last Perf Mar 30th 18
NYSE:MDC Last Perf Mar 30th 18

Essentially, profit margin shows how much money the company makes after paying for all its expenses. The other component, asset turnover, illustrates how much revenue M.D.C. Holdings can make from its asset base. And finally, financial leverage is simply how much of assets are funded by equity, which exhibits how sustainable the company’s capital structure is. Since ROE can be inflated by excessive debt, we need to examine M.D.C. Holdings’s debt-to-equity level. Currently the debt-to-equity ratio stands at a reasonable 79.16%, which means its ROE is driven by its ability to grow its profit without a significant debt burden.

NYSE:MDC Historical Debt Mar 30th 18
NYSE:MDC Historical Debt Mar 30th 18

Next Steps:

While ROE is a relatively simple calculation, it can be broken down into different ratios, each telling a different story about the strengths and weaknesses of a company. M.D.C. Holdings exhibits a weak ROE against its peers, as well as insufficient levels to cover its own cost of equity this year. Although, its appropriate level of leverage means investors can be more confident in the sustainability of M.D.C. Holdings’s return with a possible increase should the company decide to increase its debt levels. Although ROE can be a useful metric, it is only a small part of diligent research.

For M.D.C. Holdings, I’ve compiled three relevant factors you should look at:

  1. Financial Health: Does it have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.

  2. Valuation: What is M.D.C. Holdings worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether M.D.C. Holdings is currently mispriced by the market.

  3. Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of M.D.C. Holdings? Explore our interactive list of stocks with large growth potential to get an idea of what else is out there you may be missing!


To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned.

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