Will Weakness in Comfort Systems USA, Inc.'s (NYSE:FIX) Stock Prove Temporary Given Strong Fundamentals?

It is hard to get excited after looking at Comfort Systems USA's (NYSE:FIX) recent performance, when its stock has declined 28% over the past three months. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Specifically, we decided to study Comfort Systems USA'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. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

Check out our latest analysis for Comfort Systems USA

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 Comfort Systems USA is:

31% = US$522m ÷ US$1.7b (Based on the trailing twelve months to December 2024).

The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every $1 worth of equity, the company was able to earn $0.31 in profit.

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.

Comfort Systems USA's Earnings Growth And 31% ROE

First thing first, we like that Comfort Systems USA has an impressive ROE. Secondly, even when compared to the industry average of 19% the company's ROE is quite impressive. As a result, Comfort Systems USA's exceptional 30% net income growth seen over the past five years, doesn't come as a surprise.

We then compared Comfort Systems USA's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 15% in the same 5-year period.

Earnings growth is an important metric to consider when valuing a stock. 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. What is FIX worth today? The intrinsic value infographic in our free research report helps visualize whether FIX is currently mispriced by the market.

Is Comfort Systems USA Efficiently Re-investing Its Profits?

Comfort Systems USA's three-year median payout ratio to shareholders is 8.8%, which is quite low. This implies that the company is retaining 91% of its profits. So it looks like Comfort Systems USA is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Additionally, Comfort Systems USA has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 7.7%. Regardless, Comfort Systems USA's ROE is speculated to decline to 24% despite there being no anticipated change in its payout ratio.

Summary

On the whole, we feel that Comfort Systems USA's performance has been quite good. 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. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.