Floor & Decor Holdings’ (NYSE:FND) stock is up by a considerable 30% 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. In this article, we decided to focus on Floor & Decor Holdings’ ROE.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
View our latest analysis for Floor & Decor Holdings
How Is ROE Calculated?
Return on equity 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 Floor & Decor Holdings is:
18% = US$298m ÷ US$1.7b (Based on the trailing twelve months to December 2022).
The ‘return’ is the yearly profit. One way to conceptualize this is that for each $1 of shareholders’ capital it has, the company made $0.18 in profit.
What Is The Relationship Between ROE And 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. 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.
Floor & Decor Holdings’ Earnings Growth And 18% ROE
To begin with, Floor & Decor Holdings seems to have a respectable ROE. Be that as it may, the company’s ROE is still quite lower than the industry average of 23%. However, we are pleased to see the impressive 22% net income growth reported by Floor & Decor Holdings over the past five years. Therefore, there could be other causes behind this 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. Bear in mind, the company does have a respectable ROE. It is just that the industry ROE is higher. So this certainly also provides some context to the high earnings growth seen by the company.
As a next step, we compared Floor & Decor Holdings’ net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 26% in the same period.
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. Has the market priced in the future outlook for FND? You can find out in our latest intrinsic value infographic research report.
Is Floor & Decor Holdings Efficiently Re-investing Its Profits?
Given that Floor & Decor Holdings doesn’t pay any dividend to its shareholders, we infer that the company has been reinvesting all of its profits to grow its business.
On the whole, we feel that Floor & Decor Holdings’ performance has been quite good. In particular, it’s great to see that the company has seen significant growth in its earnings backed by a respectable ROE and a high reinvestment rate. On studying current analyst estimates, we found that analysts expect the company to continue its recent growth streak. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.
What are the risks and opportunities for Floor & Decor Holdings?
Trading at 4.2% below our estimate of its fair value
Earnings are forecast to grow 21% per year
Earnings grew by 5.3% over the past year
High level of non-cash earnings
Significant insider selling over the past 3 months
View all Risks and Rewards
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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.