Could The Market Be Wrong About Ethan Allen Interiors Inc. (NYSE:ETD) Given Its Attractive Financial Prospects?

Ethan Allen Interiors (NYSE:ETD) has had a rough three months with its share price down 7.8%. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. In this article, we decided to focus on Ethan Allen Interiors' ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

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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 Ethan Allen Interiors is:

13% = US$61m ÷ US$479m (Based on the trailing twelve months to December 2024).

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 $0.13.

See our latest analysis for Ethan Allen Interiors

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. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

Ethan Allen Interiors' Earnings Growth And 13% ROE

At first glance, Ethan Allen Interiors seems to have a decent ROE. Further, the company's ROE is similar to the industry average of 15%. Consequently, this likely laid the ground for the impressive net income growth of 22% seen over the past five years by Ethan Allen Interiors. However, there could also be other drivers behind this growth. For instance, the company has a low payout ratio or is being managed efficiently.

Next, on comparing with the industry net income growth, we found that Ethan Allen Interiors' growth is quite high when compared to the industry average growth of 16% in the same period, which is great to see.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. What is ETD worth today? The intrinsic value infographic in our free research report helps visualize whether ETD is currently mispriced by the market.

Is Ethan Allen Interiors Making Efficient Use Of Its Profits?

Ethan Allen Interiors' three-year median payout ratio is a pretty moderate 40%, meaning the company retains 60% of its income. So it seems that Ethan Allen Interiors is reinvesting efficiently in a way that it sees impressive growth in its earnings (discussed above) and pays a dividend that's well covered.

Additionally, Ethan Allen Interiors 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.

Summary

On the whole, we feel that Ethan Allen Interiors' performance has been quite good. 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. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. 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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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.