Declining Stock and Decent Financials: Is The Market Wrong About American Homes 4 Rent (NYSE:AMH)?

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American Homes 4 Rent (NYSE:AMH) has had a rough three months with its share price down 6.7%. However, the company’s fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. Specifically, we decided to study American Homes 4 Rent’s ROE in this article.

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.

Check out our latest analysis for American Homes 4 Rent

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 American Homes 4 Rent is:

3.3% = US$232m ÷ US$7.1b (Based on the trailing twelve months to March 2022).

The ‘return’ refers to a company’s earnings over the last year. One way to conceptualize this is that for each $1 of shareholders’ capital it has, the company made $0.03 in profit.

What Is The Relationship Between ROE And Earnings Growth?

So far, we’ve learned that ROE is a measure of a company’s profitability. Based on how much of its profits the company chooses to reinvest or “retain”, we are then able to evaluate a company’s future ability to generate profits. 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.

American Homes 4 Rent’s Earnings Growth And 3.3% ROE

As you can see, American Homes 4 Rent’s ROE looks pretty weak. Not just that, even compared to the industry average of 6.5%, the company’s ROE is entirely unremarkable. In spite of this, American Homes 4 Rent was able to grow its net income considerably, at a rate of 55% in the last five years. Therefore, there could be other reasons behind this growth. For instance, the company has a low payout ratio or is being managed efficiently.

We then compared American Homes 4 Rent’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 11% in the same period.

past-earnings-growth

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company’s expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is AMH fairly valued? This infographic on the company’s intrinsic value has everything you need to know.

Is American Homes 4 Rent Efficiently Re-investing Its Profits?

The three-year median payout ratio for American Homes 4 Rent is 36%, which is moderately low. The company is retaining the remaining 64%. So it seems that American Homes 4 Rent is reinvesting efficiently in a way that it sees impressive growth in its earnings (discussed above) and pays a dividend that’s well covered.

Moreover, American Homes 4 Rent is determined to keep sharing its profits with shareholders which we infer from its long history of nine years of paying a dividend. Looking at the current analyst consensus data, we can see that the company’s future payout ratio is expected to rise to 51% over the next three years. Regardless, the ROE is not expected to change much for the company despite the higher expected payout ratio.

Conclusion

On the whole, we do feel that American Homes 4 Rent has some positive attributes. Despite its low rate of return, the fact that the company reinvests a very high portion of its profits into its business, no doubt contributed to its high 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.