EMCOR Group, Inc.'s (NYSE:EME) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?

Published
June 30, 2022
NYSE:EME
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EMCOR Group (NYSE:EME) has had a rough three months with its share price down 9.5%. But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. Specifically, we decided to study EMCOR Group's ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

View our latest analysis for EMCOR Group

How Is ROE Calculated?

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 EMCOR Group is:

17% = US$372m ÷ US$2.1b (Based on the trailing twelve months to March 2022).

The 'return' is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each $1 of shareholders' capital it has, the company made $0.17 in profit.

Why Is ROE Important For Earnings Growth?

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

EMCOR Group's Earnings Growth And 17% ROE

To start with, EMCOR Group's ROE looks acceptable. Further, the company's ROE compares quite favorably to the industry average of 9.4%. This certainly adds some context to EMCOR Group's decent 6.4% net income growth seen over the past five years.

We then compared EMCOR Group's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 13% in the same period, which is a bit concerning.

past-earnings-growth
NYSE:EME Past Earnings Growth June 30th 2022

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about EMCOR Group's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is EMCOR Group Using Its Retained Earnings Effectively?

In EMCOR Group's case, its respectable earnings growth can probably be explained by its low three-year median payout ratio of 7.0% (or a retention ratio of 93%), which suggests that the company is investing most of its profits to grow its business.

Besides, EMCOR Group has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to drop to 5.5% over the next three years. Despite the lower expected payout ratio, the company's ROE is not expected to change by much.

Conclusion

On the whole, we feel that EMCOR Group's performance has been quite good. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see a good amount of growth in its earnings. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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