Is Kforce Inc.'s (NASDAQ:KFRC) Latest Stock Performance Being Led By Its Strong Fundamentals?

By
Simply Wall St
Published
January 09, 2022
NasdaqGS:KFRC
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Kforce's (NASDAQ:KFRC) stock up by 5.5% over the past three months. Given its impressive performance, we decided to study the company's key financial indicators as a company's long-term fundamentals usually dictate market outcomes. Particularly, we will be paying attention to Kforce's ROE today.

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.

See our latest analysis for Kforce

How Is ROE Calculated?

Return on equity 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 Kforce is:

38% = US$73m ÷ US$190m (Based on the trailing twelve months to September 2021).

The 'return' is the profit over the last twelve months. One way to conceptualize this is that for each $1 of shareholders' capital it has, the company made $0.38 in profit.

What Has ROE Got To Do With Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

Kforce's Earnings Growth And 38% ROE

Firstly, we acknowledge that Kforce has a significantly high ROE. Additionally, the company's ROE is higher compared to the industry average of 15% which is quite remarkable. This likely paved the way for the modest 15% net income growth seen by Kforce over the past five years. growth

We then performed a comparison between Kforce's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 15% in the same period.

past-earnings-growth
NasdaqGS:KFRC Past Earnings Growth January 9th 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. Is Kforce fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Kforce Using Its Retained Earnings Effectively?

Kforce has a healthy combination of a moderate three-year median payout ratio of 31% (or a retention ratio of 69%) and a respectable amount of growth in earnings as we saw above, meaning that the company has been making efficient use of its profits.

Additionally, Kforce has paid dividends over a period of eight 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 26%. Therefore, the company's future ROE is also not expected to change by much with analysts predicting an ROE of 39%.

Conclusion

Overall, we are quite pleased with Kforce's performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. 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 latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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