Declining Stock and Solid Fundamentals: Is The Market Wrong About EMCOR Group, Inc. (NYSE:EME)?

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With its stock down 7.8% over the past three months, it is easy to disregard EMCOR Group (NYSE:EME). But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. In this article, we decided to focus on EMCOR Group’s ROE.

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. Put another way, it reveals the company’s success at turning shareholder investments into profits.

Check out our latest analysis for EMCOR Group

How To 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 EMCOR Group is:

17% = US$372m ÷ US$2.1b (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 $0.17 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. 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 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.

EMCOR Group’s Earnings Growth And 17% ROE

At first glance, EMCOR Group seems to have a decent ROE. Further, the company’s ROE compares quite favorably to the industry average of 10.0%. This probably laid the ground for EMCOR Group’s moderate 6.4% net income growth seen over the past five years.

We then compared EMCOR Group’s net income growth with the industry and found that the company’s growth figure is lower than the average industry growth rate of 14% in the same period, which is a bit concerning.

past-earnings-growth

Earnings growth is an important metric to consider when valuing a stock. 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. What is EME worth today? The intrinsic value infographic in our free research report helps visualize whether EME is currently mispriced by the market.

Is EMCOR Group Using Its Retained Earnings Effectively?

In EMCOR Group’s case, its respectable earnings growth can probably be explained by its low three-year median payout ratio of 7.0% (or a retention ratio of 93%), which suggests that the company is investing most of its profits to grow its business.

Moreover, EMCOR Group 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. Based on the latest analysts’ estimates, we found that the company’s future payout ratio over the next three years is expected to hold steady at 5.6%.

Summary

In total, we are pretty happy with EMCOR Group’s performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. As a result, the decent growth in its earnings is not surprising. With that said, the latest industry analyst forecasts reveal that the company’s earnings are expected to accelerate. 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.