With its stock down 13% over the past three months, it is easy to disregard Howden Joinery Group (LON:HWDN). However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Particularly, we will be paying attention to Howden Joinery Group’s ROE today.
Return on equity or ROE is a key measure used to assess how efficiently a company’s management is utilizing the company’s capital. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
See our latest analysis for Howden Joinery Group
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 Howden Joinery Group is:
25% = UK£254m ÷ UK£1.0b (Based on the trailing twelve months to June 2024).
The ‘return’ is the yearly profit. That means that for every £1 worth of shareholders’ equity, the company generated £0.25 in profit.
So far, we’ve learned that ROE is a measure of a company’s profitability. We now need to evaluate how much profit the company reinvests or “retains” for future growth which then gives us an idea about the growth potential of the company. 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.
To begin with, Howden Joinery Group has a pretty high ROE which is interesting. Additionally, the company’s ROE is higher compared to the industry average of 15% which is quite remarkable. This likely paved the way for the modest 12% net income growth seen by Howden Joinery Group over the past five years.
As a next step, we compared Howden Joinery Group’s 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 14% in the same period.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Has the market priced in the future outlook for HWDN? You can find out in our latest intrinsic value infographic research report.
