How Did HomeTrust Bancshares Inc's (NASDAQ:HTBI) 1.44% ROE Fare Against The Industry?

This article is intended for those of you who are at the beginning of your investing journey and looking to gauge the potential return on investment in HomeTrust Bancshares Inc (NASDAQ:HTBI).

HomeTrust Bancshares Inc’s (NASDAQ:HTBI) most recent return on equity was a substandard 1.44% relative to its industry performance of 8.45% over the past year. An investor may attribute an inferior ROE to a relatively inefficient performance, and whilst this can often be the case, knowing the nuts and bolts of the ROE calculation may change that perspective and give you a deeper insight into HTBI's past performance. I will take you through how metrics such as financial leverage impact ROE which may affect the overall sustainability of HTBI's returns. See our latest analysis for HomeTrust Bancshares

What you must know about ROE

Return on Equity (ROE) weighs HomeTrust Bancshares’s profit against the level of its shareholders’ equity. For example, if the company invests $1 in the form of equity, it will generate $0.014 in earnings from this. Investors that are diversifying their portfolio based on industry may want to maximise their return in the Regional Banks sector by choosing the highest returning stock. However, this can be deceiving as each company has varying costs of equity and debt levels, which could exaggeratedly push up ROE at the same time as accumulating high interest expense.

Return on Equity = Net Profit ÷ Shareholders Equity

Returns are usually compared to costs to measure the efficiency of capital. HomeTrust Bancshares’s cost of equity is 9.95%. This means HomeTrust Bancshares’s returns actually do not cover its own cost of equity, with a discrepancy of -8.51%. This isn’t sustainable as it implies, very simply, that the company pays more for its capital than what it generates in return. ROE can be dissected into three distinct ratios: net profit margin, asset turnover, and financial leverage. This is called the Dupont Formula:

Dupont Formula

ROE = profit margin × asset turnover × financial leverage

ROE = (annual net profit ÷ sales) × (sales ÷ assets) × (assets ÷ shareholders’ equity)

ROE = annual net profit ÷ shareholders’ equity

The first component is profit margin, which measures how much of sales is retained after the company pays for all its expenses. The other component, asset turnover, illustrates how much revenue HomeTrust Bancshares can make from its asset base. Finally, financial leverage will be our main focus today. It shows how much of assets are funded by equity and can show how sustainable the company’s capital structure is. ROE can be inflated by disproportionately high levels of debt. This is also unsustainable due to the high interest cost that the company will also incur. Thus, we should look at HomeTrust Bancshares’s debt-to-equity ratio to examine sustainability of its returns. The ratio currently stands at a high 156.12%, meaning HomeTrust Bancshares may have taken on a disproportionate level of debt which is driving its return. The company’s ability to produce profit growth may hinge on its big debt burden.

Next Steps:

While ROE is a relatively simple calculation, it can be broken down into different ratios, each telling a different story about the strengths and weaknesses of a company. HomeTrust Bancshares exhibits a weak ROE against its peers, as well as insufficient levels to cover its own cost of equity this year. Also, with debt capital in excess of equity, ROE may already be inflated by the use of debt funding, raising questions over the possibility of further decline in the company’s returns. Although ROE can be a useful metric, it is only a small part of diligent research.

For HomeTrust Bancshares, I've compiled three essential factors you should look at:

1. Financial Health: Does it have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
2. Future Earnings: How does HomeTrust Bancshares's growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.
3. Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of HomeTrust Bancshares? Explore our interactive list of stocks with large growth potential to get an idea of what else is out there you may be missing!

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Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article 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.