Stock Analysis

Are Kaufman & Broad S.A.'s (EPA:KOF) Mixed Financials Driving The Negative Sentiment?

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ENXTPA:KOF
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With its stock down 30% over the past three months, it is easy to disregard Kaufman & Broad (EPA:KOF). We, however decided to study the company's financials to determine if they have got anything to do with the price decline. Long-term fundamentals are usually what drive market outcomes, so it's worth paying close attention. Particularly, we will be paying attention to Kaufman & Broad's ROE today.

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

See our latest analysis for Kaufman & Broad

How To Calculate Return On Equity?

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 Kaufman & Broad is:

28% = €67m ÷ €240m (Based on the trailing twelve months to May 2022).

The 'return' refers to a company's earnings over the last year. So, this means that for every €1 of its shareholder's investments, the company generates a profit of €0.28.

What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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.

Kaufman & Broad's Earnings Growth And 28% ROE

Firstly, we acknowledge that Kaufman & Broad has a significantly high ROE. Secondly, even when compared to the industry average of 11% the company's ROE is quite impressive. As you might expect, the 7.8% net income decline reported by Kaufman & Broad doesn't bode well with us. We reckon that there could be some other factors at play here that are preventing the company's growth. Such as, the company pays out a huge portion of its earnings as dividends, or is faced with competitive pressures.

That being said, we compared Kaufman & Broad's performance with the industry and were concerned when we found that while the company has shrunk its earnings, the industry has grown its earnings at a rate of 4.6% in the same period.

past-earnings-growth
ENXTPA:KOF Past Earnings Growth September 25th 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). This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Kaufman & Broad's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Kaufman & Broad Efficiently Re-investing Its Profits?

Kaufman & Broad's declining earnings is not surprising given how the company is spending most of its profits in paying dividends, judging by its three-year median payout ratio of 93% (or a retention ratio of 6.6%). The business is only left with a small pool of capital to reinvest - A vicious cycle that doesn't benefit the company in the long-run. Our risks dashboard should have the 2 risks we have identified for Kaufman & Broad.

In addition, Kaufman & Broad has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth. Existing analyst estimates suggest that the company's future payout ratio is expected to drop to 63% over the next three years. Regardless, the ROE is not expected to change much for the company despite the lower expected payout ratio.

Conclusion

Overall, we have mixed feelings about Kaufman & Broad. Despite the high ROE, the company has a disappointing earnings growth number, due to its poor rate of reinvestment into its business. That being so, the latest industry analyst forecasts show that the analysts are expecting to see a huge improvement in the company's earnings 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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About ENXTPA:KOF

Kaufman & Broad

Kaufman & Broad S.A. operates as a property developer and builder in France.

The Snowflake is a visual investment summary with the score of each axis being calculated by 6 checks in 5 areas.

Analysis AreaScore (0-6)
Valuation2
Future Growth3
Past Performance2
Financial Health4
Dividends2

Read more about these checks in the individual report sections or in our analysis model.

Adequate balance sheet with moderate growth potential.