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TopBuild Corp.’s (NYSE:BLD) Stock Has Been Sliding But Fundamentals Look Strong: Is The Market Wrong?


TopBuild (NYSE:BLD) has had a rough three months with its share price down 22%. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Specifically, we decided to study TopBuild’s ROE in this article.

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. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company’s shareholders.

Check out our latest analysis for TopBuild

How To Calculate Return On Equity?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity

So, based on the above formula, the ROE for TopBuild is:

22% = US$379m ÷ US$1.7b (Based on the trailing twelve months to March 2022).

The ‘return’ is the profit over the last twelve months. One way to conceptualize this is that for each $1 of shareholders’ capital it has, the company made $0.22 in profit.

What Has ROE Got To Do With Earnings Growth?

So far, we’ve learned that ROE is a measure of a company’s profitability. 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.

TopBuild’s Earnings Growth And 22% ROE

Firstly, we acknowledge that TopBuild has a significantly high ROE. Additionally, a comparison with the average industry ROE of 21% also portrays the company’s ROE in a good light. As a result, TopBuild’s remarkable 25% net income growth seen over the past 5 years is likely aided by its high ROE.

Next, on comparing TopBuild’s net income growth with the industry, we found that the company’s reported growth is similar to the industry average growth rate of 31% in the same period.

NYSE:BLD Past Earnings Growth June 23rd 2022

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. If you’re wondering about TopBuild’s’s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is TopBuild Efficiently Re-investing Its Profits?

TopBuild doesn’t pay any dividend to its shareholders, meaning that the company has been reinvesting all of its profits into the business. This is likely what’s driving the high earnings growth number discussed above.

Summary

Overall, we are quite pleased with TopBuild’s performance. In particular, it’s great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. Having said that, the company’s earnings growth is expected to slow down, as forecasted in the current analyst estimates. Are these analysts expectations based on the broad expectations for the industry, or on the company’s fundamentals? Click here to be taken to our analyst’s forecasts page 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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