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Declining Stock and Solid Fundamentals: Is The Market Wrong About M.D.C. Holdings, Inc. (NYSE:MDC)?

Simply Wall St
·4 min read

It is hard to get excited after looking at M.D.C. Holdings' (NYSE:MDC) recent performance, when its stock has declined 6.4% over the past three months. 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. Specifically, we decided to study M.D.C. Holdings' 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. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View our latest analysis for M.D.C. Holdings

How Is ROE Calculated?

ROE can be calculated by using the formula:

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

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So, based on the above formula, the ROE for M.D.C. Holdings is:

22% = US$647m ÷ US$2.9b (Based on the trailing twelve months to June 2022).

The 'return' is the profit over the last twelve months. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.22.

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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.

A Side By Side comparison of M.D.C. Holdings' Earnings Growth And 22% ROE

First thing first, we like that M.D.C. Holdings has an impressive ROE. Additionally, a comparison with the average industry ROE of 21% also portrays the company's ROE in a good light. Therefore, it might not be wrong to say that the impressive five year 33% net income growth seen by M.D.C. Holdings was probably achieved as a result of the high ROE.

As a next step, we compared M.D.C. Holdings' net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 27%.

past-earnings-growth
past-earnings-growth

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about M.D.C. Holdings''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is M.D.C. Holdings Making Efficient Use Of Its Profits?

M.D.C. Holdings' three-year median payout ratio is a pretty moderate 26%, meaning the company retains 74% of its income. By the looks of it, the dividend is well covered and M.D.C. Holdings is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Moreover, M.D.C. Holdings is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years.

Summary

Overall, we are quite pleased with M.D.C. Holdings' performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. With that said, on studying the latest analyst forecasts, we found that while the company has seen growth in its past earnings, analysts expect its future earnings to shrink. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

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