Stock Analysis

Are Robust Financials Driving The Recent Rally In Floor & Decor Holdings, Inc.'s (NYSE:FND) Stock?

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NYSE:FND
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Most readers would already be aware that Floor & Decor Holdings' (NYSE:FND) stock increased significantly by 16% over the past three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. In this article, we decided to focus on Floor & Decor Holdings' 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.

Check out our latest analysis for Floor & Decor Holdings

How Do You Calculate Return On Equity?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Floor & Decor Holdings is:

19% = US$277m ÷ US$1.5b (Based on the trailing twelve months to June 2022).

The 'return' is the yearly profit. Another way to think of that is that for every $1 worth of equity, the company was able to earn $0.19 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. 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.

Floor & Decor Holdings' Earnings Growth And 19% ROE

To start with, Floor & Decor Holdings' ROE looks acceptable. Even so, when compared with the average industry ROE of 30%, we aren't very excited. However, we are pleased to see the impressive 26% net income growth reported by Floor & Decor Holdings over the past five years. Therefore, there could be other causes behind this growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio. Bear in mind, the company does have a respectable ROE. It is just that the industry ROE is higher. So this also does lend some color to the high earnings growth seen by the company.

We then performed a comparison between Floor & Decor Holdings' net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 32% in the same period.

past-earnings-growth
NYSE:FND Past Earnings Growth September 9th 2022

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). Doing so will help them establish if the stock's future looks promising or ominous. Has the market priced in the future outlook for FND? You can find out in our latest intrinsic value infographic research report.

Is Floor & Decor Holdings Making Efficient Use Of Its Profits?

Floor & Decor Holdings doesn't pay any dividend to its shareholders, meaning that the company has been reinvesting all of its profits into the business. This is likely what's driving the high earnings growth number discussed above.

Summary

Overall, we are quite pleased with Floor & Decor Holdings' performance. In particular, it's great to see that the company has seen significant growth in its earnings backed by a respectable ROE and a high reinvestment rate. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. 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.

What are the risks and opportunities for Floor & Decor Holdings?

Floor & Decor Holdings, Inc. operates as a multi-channel specialty retailer and commercial flooring distributor of hard surface flooring and related accessories.

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Rewards

  • Trading at 14.1% below our estimate of its fair value

  • Earnings are forecast to grow 20.78% per year

Risks

  • High level of non-cash earnings

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About NYSE:FND

Floor & Decor Holdings

Floor & Decor Holdings, Inc. operates as a multi-channel specialty retailer and commercial flooring distributor of hard surface flooring and related accessories.

The Snowflake is a visual investment summary with the score of each axis being calculated by 6 checks in 5 areas.

Analysis AreaScore (0-6)
Valuation1
Future Growth4
Past Performance1
Financial Health4
Dividends0

Read more about these checks in the individual report sections or in our analysis model.

Reasonable growth potential with adequate balance sheet.