Yahoo Finance JB Hi-Fi Limited's (ASX:JBH) Stock Is Going Strong: Is the Market Following Fundamentals?
Most readers would already be aware that JB Hi-Fi's (ASX:JBH) stock increased significantly by 20% over the past three months. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. In this article, we decided to focus on JB Hi-Fi's ROE.
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.
See our latest analysis for JB Hi-Fi
How To Calculate Return On Equity?
ROE can be calculated by using the formula:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for JB Hi-Fi is:
30% = AU$459m ÷ AU$1.5b (Based on the trailing twelve months to December 2023).
The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each A$1 of shareholders' capital it has, the company made A$0.30 in profit.
What Has ROE Got To Do With Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.
JB Hi-Fi's Earnings Growth And 30% ROE
First thing first, we like that JB Hi-Fi has an impressive ROE. Additionally, the company's ROE is higher compared to the industry average of 17% which is quite remarkable. This likely paved the way for the modest 17% net income growth seen by JB Hi-Fi over the past five years.
We then performed a comparison between JB Hi-Fi's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 18% in the same 5-year period.
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. Has the market priced in the future outlook for JBH? You can find out in our latest intrinsic value infographic research report.
Is JB Hi-Fi Efficiently Re-investing Its Profits?
JB Hi-Fi has a significant three-year median payout ratio of 66%, meaning that it is left with only 34% to reinvest into its business. This implies that the company has been able to achieve decent earnings growth despite returning most of its profits to shareholders.
Moreover, JB Hi-Fi 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. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 67% of its profits over the next three years. Accordingly, forecasts suggest that JB Hi-Fi's future ROE will be 24% which is again, similar to the current ROE.
Summary
Overall, we are quite pleased with JB Hi-Fi's performance. In particular, its high ROE is quite noteworthy and also the probable explanation behind its considerable earnings growth. Yet, the company is retaining a small portion of its profits. Which means that the company has been able to grow its earnings in spite of it, so that's not too bad. With that said, on studying the latest analyst forecasts, we found that while the company has seen growth in its past earnings, analysts expect its future earnings to shrink. 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.
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.
