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Declining Stock and Solid Fundamentals: Is The Market Wrong About eXp World Holdings, Inc. (NASDAQ:EXPI)?

With its stock down 24% over the past month, it is easy to disregard eXp World Holdings (NASDAQ:EXPI). 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. Specifically, we decided to study eXp World Holdings’ ROE in this article.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

View our latest analysis for eXp World Holdings

How Is ROE Calculated?

The formula for ROE is:

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

So, based on the above formula, the ROE for eXp World Holdings is:

22% = US$57m ÷ US$257m (Based on the trailing twelve months to June 2022).

The ‘return’ is the income the business earned over the last year. That means that for every $1 worth of shareholders’ equity, the company generated $0.22 in profit.

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. We now need to evaluate how much profit the company reinvests or “retains” for future growth which then gives us an idea about the growth potential of the company. 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.

eXp World Holdings’ Earnings Growth And 22% ROE

Firstly, we acknowledge that eXp World Holdings has a significantly high ROE. Additionally, the company’s ROE is higher compared to the industry average of 15% which is quite remarkable. Under the circumstances, eXp World Holdings’ considerable five year net income growth of 71% was to be expected.

As a next step, we compared eXp World 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 18%.

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. Is eXp World Holdings fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is eXp World Holdings Using Its Retained Earnings Effectively?

eXp World Holdings’ ‘ three-year median payout ratio is on the lower side at 18% implying that it is retaining a higher percentage (82%) of its profits. So it looks like eXp World Holdings is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Along with seeing a growth in earnings, eXp World Holdings only recently started paying dividends. Its quite possible that the company was looking to impress its shareholders. 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 14%.

Conclusion

In total, we are pretty happy with eXp World 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. Having said that, the company’s earnings growth is expected to slow down, as forecasted in the current analyst estimates. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts 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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