Are Robust Financials Driving The Recent Rally In Lifestyle Communities Limited's (ASX:LIC) Stock?

Most readers would already be aware that Lifestyle Communities' (ASX:LIC) stock increased significantly by 6.5% over the past week. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. Specifically, we decided to study Lifestyle Communities' 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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

See our latest analysis for Lifestyle Communities

How Do You Calculate Return On Equity?

The formula for return on equity is:

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

So, based on the above formula, the ROE for Lifestyle Communities is:

16% = AU$82m ÷ AU$525m (Based on the trailing twelve months to June 2023).

The 'return' is the yearly profit. So, this means that for every A$1 of its shareholder's investments, the company generates a profit of A$0.16.

What Is The Relationship Between ROE And Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.

A Side By Side comparison of Lifestyle Communities' Earnings Growth And 16% ROE

To begin with, Lifestyle Communities seems to have a respectable ROE. Further, the company's ROE compares quite favorably to the industry average of 6.8%. This certainly adds some context to Lifestyle Communities' decent 15% net income growth seen over the past five years.

As a next step, we compared Lifestyle Communities' 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 12% in the same period.

Earnings growth is a huge factor in stock valuation. 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 stock's future looks promising or ominous. Is Lifestyle Communities fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Lifestyle Communities Using Its Retained Earnings Effectively?

Lifestyle Communities has a low three-year median payout ratio of 13%, meaning that the company retains the remaining 87% of its profits. This suggests that the management is reinvesting most of the profits to grow the business.

Additionally, Lifestyle Communities has paid dividends over a period of eight years which means that the company is pretty serious about sharing its profits with shareholders. Our latest analyst data shows that the future payout ratio of the company is expected to rise to 19% over the next three years. Despite the higher expected payout ratio, the company's ROE is not expected to change by much.

Summary

In total, we are pretty happy with Lifestyle Communities' 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. The latest industry analyst forecasts show that the company is expected to maintain its current growth rate. 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.

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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.