Comfort Systems USA's (NYSE:FIX) stock is up by a considerable 38% over the past three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Specifically, we decided to study Comfort Systems USA's ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors' money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

How Do You Calculate Return On Equity?

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 Comfort Systems USA is:

29% = US$427m ÷ US$1.5b (Based on the trailing twelve months to June 2024).

The 'return' is the yearly profit. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.29.

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.

Comfort Systems USA's Earnings Growth And 29% ROE

Firstly, we acknowledge that Comfort Systems USA has a significantly high ROE. Secondly, even when compared to the industry average of 13% the company's ROE is quite impressive. Under the circumstances, Comfort Systems USA's considerable five year net income growth of 27% was to be expected.

Next, on comparing with the industry net income growth, we found that Comfort Systems USA's growth is quite high when compared to the industry average growth of 18% in the same period, which is great to see.

Earnings growth is an important metric to consider when valuing a stock. 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. If you're wondering about Comfort Systems USA's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Comfort Systems USA Efficiently Re-investing Its Profits?

Comfort Systems USA has a really low three-year median payout ratio of 9.4%, meaning that it has the remaining 91% left over to reinvest into its business. So it looks like Comfort Systems USA is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Moreover, Comfort Systems USA is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 7.6%. As a result, Comfort Systems USA's ROE is not expected to change by much either, which we inferred from the analyst estimate of 26% for future ROE.

Summary

Overall, we are quite pleased with Comfort Systems USA's 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. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

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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.