In recent months, Legacy Housing (NASDAQ:LEGH) has seen its share price decline by 11%. However, upon closer examination of the company’s financial indicators, we find that they look quite robust. This could potentially signal a rise in the long-term given how markets usually reward companies with resilient fundamentals. In this article, we will focus on Legacy Housing’s return on equity (ROE) as a key measure to assess the efficiency of its management.
Understanding Return on Equity (ROE)
Return on equity or ROE is a crucial metric used to evaluate how efficiently a company’s management utilizes its capital. In simple terms, ROE shows the profit each dollar generates with respect to its shareholder investments. To calculate ROE, we use the following formula:
How Is ROE Calculated?
ROE = Net Profit (from continuing operations) ÷ Shareholders’ Equity
Using this formula, we can see that Legacy Housing’s ROE is:
11% = US$54m ÷ US$479m (Based on the trailing twelve months to September 2024)
This means that for every $1 worth of shareholders’ equity, the company generated $0.11 in profit.
Why Is ROE Important For Earnings Growth?
ROE measures how efficiently a company is generating its profits. However, we also need to evaluate how much profit the company reinvests or ‘retains’ for future growth. This gives us an idea about the growth potential of the company. Companies with both high ROE and higher profit retention tend to have higher growth rates compared to those without these features.
Legacy Housing’s Earnings Growth And 11% ROE
Legacy Housing’s ROE looks acceptable, but it is still lower than the industry average of 16%. However, the company has seen a moderate 15% net income growth over the past five years. This could be attributed to high earnings retention or an efficient management in place.
Comparison with Industry Average
We compared Legacy Housing’s net income growth with the industry and found that the company’s growth is lower than the industry average of 19%. However, this also provides context to the company’s ROE being lower than the industry average.
Is Legacy Housing Using Its Retained Earnings Effectively?
Legacy Housing does not pay any regular dividends, meaning that all its profits are reinvested in the business. This explains the fair bit of earnings growth the company has seen.
Conclusion
On the whole, we feel that Legacy Housing has some positive attributes. The company is investing heavily into its business and has a moderate rate of return, resulting in respectable growth in its earnings. However, our analysis also shows that the company is expected to see a slowdown in its future earnings growth.
Additional Resources
For more information on analyst predictions for Legacy Housing, check out this visualization of analyst forecasts for the company.
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Disclaimer
This article is general in nature and provides commentary based on historical data and analyst forecasts only using an unbiased methodology. Our articles are not intended to be financial advice and do not constitute a recommendation to buy or sell any stock. We aim to bring you long-term focused analysis driven by fundamental data.
Sources
- Legacy Housing’s latest annual report
- Industry reports and analyst forecasts
Note: This article is for informational purposes only and should not be considered as investment advice. It is essential to consult with a financial advisor or conduct your own research before making any investment decisions.
