Has KB Homes (NYSE:KBH) Impressive Stock Performance Got Anything to Do With Its Fundamentals? – Simply Wall St

KB Home (NYSE:KBH) has had a great run on the share market with its stock up by a significant 24% over the last 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 companys 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 KB 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. Put another way, it reveals the companys success at turning shareholder investments into profits.

See our latest analysis for KB Home

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 KB Home is:

12% = US$303m US$2.5b (Based on the trailing twelve months to May 2020).

The return refers to a companys earnings over the last year. Another way to think of that is that for every $1 worth of equity, the company was able to earn $0.12 in profit.

So far, weve learned that ROE is a measure of a companys profitability. Based on how much of its profits the company chooses to reinvest or retain, we are then able to evaluate a companys future ability to generate profits. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that dont necessarily bear these characteristics.

To start with, KB Homes ROE looks acceptable. Even when compared to the industry average of 14% the companys ROE looks quite decent. As you might expect, the 14% net income decline reported by KB Home is a bit of a surprise. Based on this, we feel that there might be other reasons which havent been discussed so far in this article that could be hampering the companys growth. Such as, the company pays out a huge portion of its earnings as dividends, or is faced with competitive pressures.

However, when we compared KB Homes growth with the industry we found that while the companys earnings have been shrinking, the industry has seen an earnings growth of 18% in the same period. This is quite worrisome.

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stocks future looks promising or ominous. Is KB Home fairly valued compared to other companies? These 3 valuation measures might help you decide.

KB Homes low three-year median payout ratio of 6.4% (or a retention ratio of 94%) over the last three years should mean that the company is retaining most of its earnings to fuel its growth but the companys earnings have actually shrunk. This typically shouldnt be the case when a company is retaining most of its earnings. So there could be some other explanations in that regard. For example, the companys business may be deteriorating.

Moreover, KB Home has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth. Our latest analyst data shows that the future payout ratio of the company is expected to rise to 9.5% over the next three years.

On the whole, we do feel that KB Home has some positive attributes. Although, we are disappointed to see a lack of growth in earnings even in spite of a high ROE and and a high reinvestment rate. We believe that there might be some outside factors that could be having a negative impact on the business. With that said, we studied the latest analyst forecasts and found that while the company has shrunk its earnings in the past, analysts expect its earnings to grow in the future. Are these analysts expectations based on the broad expectations for the industry, or on the companys fundamentals? Click here to be taken to our analysts forecasts page for the company.

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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. *Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

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Has KB Homes (NYSE:KBH) Impressive Stock Performance Got Anything to Do With Its Fundamentals? - Simply Wall St