Granite Construction Incorporated (NYSE: GVA) is up but financial outlook looks weak: is the stock overvalued?

Granite Construction (NYSE: GVA) had a strong run in the equity market with a significant 5.4% increase in its shares over the past month. However, we wanted to take a closer look at its key financial indicators as markets typically pay for long-term fundamentals, and in this case, they don’t look very promising. In particular, we will pay particular attention to the ROE of Granite Construction today.

Return on equity or ROE is a test of how effectively a company increases its value and manages investor money. Simply put, it is used to assess a company’s profitability against its equity.

Check out our latest review for granite construction

How do you calculate return on equity?

The formula for ROE is:

Return on equity = Net income (from continuing operations) ÷ Equity

So, based on the above formula, the ROE for granite construction is:

2.8% = US $ 29 million ÷ US $ 1.0 billion (based on the last twelve months to September 2021).

“Return” refers to a company’s profits over the past year. This therefore means that for every $ 1 invested by its shareholder, the company generates a profit of $ 0.03.

Why is ROE important for profit growth?

So far, we’ve learned that ROE measures how efficiently a business generates profits. We now need to assess the profits that the business is reinvesting or “withholding” for future growth, which then gives us an idea of ​​the growth potential of the business. Assuming everything else remains the same, the higher the ROE and profit retention, the higher the growth rate of a business compared to businesses that don’t necessarily have these characteristics.

Granite Construction profit growth and 2.8% ROE

It is difficult to say that the ROE of Granite Construction is very good on its own. Even compared to the industry average ROE of 9.4%, the company’s ROE is pretty dismal. Therefore, it may not be wrong to say that the 57% drop in five-year net income observed by Granite Construction may have been the result of lower ROE. However, other factors could also cause lower income. For example, the company has a very high payout rate or faces competitive pressures.

However, when we compared Granite Construction’s growth to that of the industry, we found that even though the company’s profits declined, the industry saw profit growth of 15% over the same period. period. It is quite worrying.

NYSE: GVA Past Profit Growth November 27, 2021

Profit growth is an important metric to consider when valuing a stock. It is important for an investor to know whether the market has factored in the expected growth (or decline) in company earnings. This will help them determine whether the future of the stock looks bright or threatening. Has the market taken into account the future prospects of GVA? You can find out in our latest Intrinsic Value infographic research report.

Is Granite Construction Efficiently Using Its Profits?

Granite Construction’s decline in earnings is not surprising considering how the company spends most of its profits on paying dividends, judging by its LTM (or last twelve months) payout ratio of 76. % (or a retention rate of 24%). With very little to reinvest in the business, earnings growth is far from likely.

Additionally, Granite Construction has paid dividends over a period of at least ten years, suggesting that sustaining dividend payments is much more important to management, even if it comes at the expense of business growth. business. Our latest analyst data shows the company’s future payout ratio is expected to drop to 20% over the next three years.

Summary

Overall, the performance of Granite Construction is quite disappointing. Due to its low ROE and lack of reinvestment in the business, the company recorded a disappointing rate of profit growth. That said, looking at current analysts’ estimates, we found that the company’s earnings growth rate is expected to see a huge improvement. To learn more about the latest analyst forecast for the business, check out this visualization of the analyst forecast for the business.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.

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