Yahoo Finance Declining Stock and Solid Fundamentals: Is The Market Wrong About Fortune Brands Home & Security, Inc. (NYSE:FBHS)?
With its stock down 4.2% over the past month, it is easy to disregard Fortune Brands Home & Security (NYSE:FBHS). But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. In this article, we decided to focus on Fortune Brands Home & Security's ROE.
Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. Put another way, it reveals the company's success at turning shareholder investments into profits.
See our latest analysis for Fortune Brands Home & Security
How Do You Calculate Return On Equity?
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 Fortune Brands Home & Security is:
24% = US$724m ÷ US$3.0b (Based on the trailing twelve months to June 2021).
The 'return' is the income the business earned over the last year. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.24.
What Has ROE Got To Do With Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.
Fortune Brands Home & Security's Earnings Growth And 24% ROE
Firstly, we acknowledge that Fortune Brands Home & Security has a significantly high ROE. Secondly, even when compared to the industry average of 19% the company's ROE is quite impressive. This probably laid the groundwork for Fortune Brands Home & Security's moderate 7.4% net income growth seen over the past five years.
Next, on comparing Fortune Brands Home & Security's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 9.0% in the same period.
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. 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 FBHS? You can find out in our latest intrinsic value infographic research report.
Is Fortune Brands Home & Security Efficiently Re-investing Its Profits?
With a three-year median payout ratio of 28% (implying that the company retains 72% of its profits), it seems that Fortune Brands Home & Security is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that's well covered.
Moreover, Fortune Brands Home & Security is determined to keep sharing its profits with shareholders which we infer from its long history of eight years of paying a dividend. Our latest analyst data shows that the future payout ratio of the company is expected to drop to 18% over the next three years. Despite the lower expected payout ratio, the company's ROE is not expected to change by much.
Summary
In total, we are pretty happy with Fortune Brands Home & Security's performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.
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.
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