Return on equity
Return on equity (or ROE) 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. It is an important indicator for potential investors, because they want to see how efficiently a company will use its money to generate net income.
Peer group ROE
Most of the major homebuilders reported negative ROE between 2006 and 2011. PulteGroup (PHM) is no exception. With the onset of recovery in 2012, ROE also improved for most of the players. PulteGroup (PHM) reported ROE of 9.65%, while D.R. Horton (DHI) reported 11.35% and Toll Brothers (TOL) reported 9.78%. Lennar (LEN) had the highest ROE of 14.4%.
PulteGroup’s ROIC is the highest
Return on invested capital (or ROIC), which is a profitability ratio, measures the return that an investment generates over total invested capital, including debt. ROIC is a better measure of efficiency than ROE because it removes the debt-related distortion that can make highly leveraged companies look very profitable when using ROE.
PulteGroup’s ROIC was the highest in its peer group at 6.86%, indicating that the company is very good at turning capital into profits. PulteGroup is followed by D.R. Horton (DHI), Lennar (LEN), and Toll Brothers (TOL) with respective ROICs of 6.51%, 6.36%, and 5.2%.
Investors looking for diversification in the homebuilding sector can consider homebuilding ETFs such as the SPDR S&P Homebuilders ETF (XHB) and the iShares Dow Jones US Home Construction Index Fund (ITB).