Invitation Homes Inc.'s (NYSE:INVH) Stock Has Shown A Decent Performance: Have Financials A Role To Play?

Most readers would already know that Invitation Homes' (NYSE:INVH) stock increased by 3.5% over the past month. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to investigate if the company's decent financials had a hand to play in the recent price move. Particularly, we will be paying attention to Invitation Homes' ROE today.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for Invitation Homes

How Do You Calculate Return On Equity?

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 Invitation Homes is:

3.7% = US$385m ÷ US$10b (Based on the trailing twelve months to December 2022).

The 'return' is the yearly profit. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.04.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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 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.

A Side By Side comparison of Invitation Homes' Earnings Growth And 3.7% ROE

It is hard to argue that Invitation Homes' ROE is much good in and of itself. Even compared to the average industry ROE of 6.8%, the company's ROE is quite dismal. In spite of this, Invitation Homes was able to grow its net income considerably, at a rate of 53% in the last five years. Therefore, there could be other reasons behind this growth. Such as - high earnings retention or an efficient management in place.

Next, on comparing with the industry net income growth, we found that Invitation Homes' growth is quite high when compared to the industry average growth of 13% 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. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. Is INVH fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Invitation Homes Making Efficient Use Of Its Profits?

The three-year median payout ratio for Invitation Homes is 49%, which is moderately low. The company is retaining the remaining 51%. By the looks of it, the dividend is well covered and Invitation Homes is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Additionally, Invitation Homes has paid dividends over a period of six years which means that the company is pretty serious about sharing its profits with shareholders. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to rise to 128% over the next three years. Still, forecasts suggest that Invitation Homes' future ROE will rise to 5.0% even though the the company's payout ratio is expected to rise. We presume that there could some other characteristics of the business that could be driving the anticipated growth in the company's ROE.

Conclusion

In total, it does look like Invitation Homes has some positive aspects to its business. Even in spite of the low rate of return, the company has posted impressive earnings growth as a result of reinvesting heavily into its business. 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.

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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.