Return on equity: A definition
The return on equity (or RoE) ratio is a profitability ratio that measures the ability of a firm to generate profits from its shareholders’ investments in the company. In other words, the RoE ratio shows how much profit each dollar of common stockholders’ equity generates.
RoE is an important indicator for potential investors because they want to see how efficiently a company uses its money to generate net income.
Lennar has highest RoE among its peers
Lennar’s return on equity was 14.37% as of November 2014. That’s the highest RoE among homebuilders in the industry. Other major competitors such as D.R. Horton (DHI), PulteGroup (PHM), and Toll Brothers (TOL) reported RoE of 11.57%, 10.11%, and 9.93%, respectively.
This indicates that Lennar’s (LEN) management is very effective in using equity financing to fund operations and grow the company. Although Lennar (LEN) reported higher RoE, it’s still below its pre-boom level of 30.2% in 2005.
RoIC is slightly lower
Return on invested capital (or RoIC) is a profitability ratio. It measures the return an investment generates over total invested capital, including debt.
Lennar (LEN) reported RoIC of 6.10% in 2014 compared to PulteGroup (PHM), which had the highest RoIC in the industry at 7.09%. D.R. Horton followed with RoIC of 6.57%, and Toll Brothers (TOL) came in at 5.26%.
RoIC tells us how good a company is at turning capital into profits. Most homebuilders provide returns in the same range.