The last time I wrote about H&R Block (NYSE: HRB), I was cautiously optimistic about its long-term prospects. Despite its quarterly loss, the tax services provider had some positives to offer investors. Now I am going to evaluate the stock's return-generating capacity in context with its price and compare it with its competitors.
Evaluating profitability
Return on equity is a crucial metric that evaluates how effectively a company is utilizing its finances. In this context, Block's ROE at 51.43% is much better than its rivals Intuit (Nasdaq: INTU), which has an ROE of 22.65%, and Paychex (Nasdaq: PAYX), with an ROE of 35.73%.
Stability and yields
Because ROE doesn't include the use of debt in its measurement of efficiency, it's important to check out the balance sheet as well as ensure that a company's capitalization is healthy. With a debt-to-equity ratio of 212.7%, Block doesn't look nearly as stable as its peer Intuit, whose ratio stands at 35.4%. In fact, this figure is dangerously high for H&R Block.
Despite this, the company has a decent current yield of 3.70% and a payout ratio of 48%, which is both healthy and attractive. It recently declared a quarterly cash dividend of $0.15 per share. This will be Block's 195th consecutive quarterly dividend, reflecting an unwavering trend of paying dividends.
Valuation
With a forward P/E of 9.5, Block is definitely cheaper than Intuit at 17.6 and Paychex at 19.6. Block's enterprise value to EBITDA or the enterprise multiple, a measure of how expensive a stock is, stands at 5.4 times. For Intuit, the ratio stands at 11.4 times while for Paychex, it is 11.8 times. Block's enterprise value/revenue, another fundamental indicator of the value of a stock, stands at 1.3 times. Intuit again looks comparatively expensive at 3.7 times.
The Foolish bottom line
Block's quarterly revenue growth on a year-on-year basis was a negative 8.90%, compared to Intuit's growth of 15%. H&R Block is cheap, but you're getting a lot of added baggage along with that value. So it's for a good reason. The balance sheet is not built to last, and recent performance hasn't been strong. Caveat emptor.
