Most readers would already be aware that Toll Brothers' (NYSE:TOL) stock increased significantly by 17% over the past month. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. Particularly, we will be paying attention to Toll Brothers'  ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Our free stock report includes 1 warning sign investors should be aware of before investing in Toll Brothers. Read for free now.

How Is ROE Calculated?

The formula for return on equity is:

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

So, based on the above formula, the ROE for Toll Brothers is:

19% = US$1.5b ÷ US$7.8b (Based on the trailing twelve months to January 2025).

The 'return' is the amount earned after tax over the last twelve months. That means that for every $1 worth of shareholders' equity, the company generated $0.19 in profit.

See our latest analysis for Toll Brothers

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. 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 all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

Toll Brothers' Earnings Growth And 19% ROE

To start with, Toll Brothers' ROE looks acceptable. Further, the company's ROE compares quite favorably to the industry average of 15%. Probably as a result of this, Toll Brothers was able to see an impressive net income growth of 26% over the last five years. We reckon that there could also be other factors at play here. For instance, the company has a low payout ratio or is being managed efficiently.

Next, on comparing with the industry net income growth, we found that Toll Brothers' growth is quite high when compared to the industry average growth of 14% in the same period, which is great to see.NYSE:TOL Past Earnings Growth May 14th 2025

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. Is TOL fairly valued? This infographic on the company's intrinsic value  has everything you need to know.

Story Continues

Is Toll Brothers Using Its Retained Earnings Effectively?

Toll Brothers' three-year median payout ratio to shareholders is 6.4%, which is quite low. This implies that the company is retaining 94% of its profits. So it looks like Toll Brothers is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Besides, Toll Brothers has been paying dividends over a period of eight years. This shows that the company is committed to sharing profits with its shareholders. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 6.2% of its profits over the next three years. Regardless, Toll Brothers' ROE is speculated to decline to 15% despite there being no anticipated change in its payout ratio.

Summary

Overall, we are quite pleased with Toll Brothers' performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. 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.

View Comments