It’s hard to get excited looking at the recent performance of Johnson Service Group (LON:JSG) when the stock is down 28% over the past three months. It seems that the market has completely ignored the positive aspects of the company’s fundamentals and decided to give more weight to the negative aspects. Long-term fundamentals usually drive market outcomes, so it pays to pay close attention. Today we will be paying special attention to the ROE of the Johnson Service Group.
Return on Equity or ROE is an important factor to consider by a shareholder as it tells them how effectively their capital is being reinvested. Put simply, it measures a company’s profitability in relation to its equity.
Check out our latest analysis for Johnson Service Group
How do you calculate return on equity?
That Formula for return on equity is:
Return on Equity = Net Income (from continuing operations) ÷ Equity
So, based on the formula above, the ROE for the Johnson Service Group is:
2.5% = £6.9m ÷ £272m (based on trailing 12 months to December 2021).
The “return” is the income that the company has made in the last year. One way to conceptualize this is that for every £1 of shareholder capital it has, the company makes £0.03 of profit.
Why is ROE important for earnings growth?
We have already established that ROE serves as an efficient profitable measure of a company’s future profits. Based on how much of its profits the company chooses to reinvest, or “retain,” we are then able to assess a company’s future ability to generate profits. Assuming all else being equal, companies that exhibit both higher return on equity and higher earnings retention tend to be those that exhibit a higher growth rate than companies that do not share the same characteristics.
Johnson Service Group earnings growth and 2.5% ROE
It’s hard to argue that Johnson Service Group’s ROE is very good in and of itself. Even compared to the industry average ROE of 12%, the company’s ROE is pretty dismal. Given the circumstances, the sharp 41% drop in net income that Johnson Service Group has seen over the past five years isn’t surprising. We believe there may be other issues negatively impacting the company’s earnings prospects. For example, the company has allocated capital poorly or the company has a very high payout ratio.
As a next step, we compared Johnson Service Group’s performance to the industry and found that Johnson Service Group’s performance is depressing even compared to the industry, which has shrunk its profits by 2.9% over the same period, which is slower as the company.
Earnings growth is an important factor in stock valuation. It’s important for an investor to know whether the market has priced in the company’s expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. Is JSG Fairly Rated? This company intrinsic value infographic has everything you need to know.
Is Johnson Service Group using its profits efficiently?
While the company has historically paid a portion of its dividend, it currently pays no dividend. This implies that potentially all profits are reinvested in the company.
Overall, we feel that the performance shown by the Johnson Service Group is open to many interpretations. While the company has a high reinvestment rate, the low ROE means that all of these reinvestments are of no benefit to investors and, moreover, have a negative impact on earnings growth. With this in mind, we examined the latest analyst forecasts and found that while the company has a history of shrinking earnings, analysts expect its earnings to rise going forward. Are these analyst expectations based on broader expectations for the industry or on company fundamentals? Click here to go to our analyst’s forecast page for the company.
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This Simply Wall St article is of a general nature. We provide comments based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended as financial advice. It is not a recommendation to buy or sell any stock and does not take into account your goals or financial situation. Our goal is to offer you long-term focused analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any of the stocks mentioned.