Most readers would already be aware that Justin Allen Holdings’ (HKG:1425) stock increased significantly by 32% over the past month. 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 Justin Allen Holdings’ ROE.
Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company’s shareholders.
How To 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 Justin Allen Holdings is:
25% = HK$106m ÷ HK$431m (Based on the trailing twelve months to December 2020).
The ‘return’ is the profit over the last twelve months. That means that for every HK$1 worth of shareholders’ equity, the company generated HK$0.25 in profit.
Why Is ROE Important For Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.
A Side By Side comparison of Justin Allen Holdings’ Earnings Growth And 25% ROE
Firstly, we acknowledge that Justin Allen Holdings has a significantly high ROE. Secondly, even when compared to the industry average of 6.4% the company’s ROE is quite impressive. So, the substantial 21% net income growth seen by Justin Allen Holdings over the past five years isn’t overly surprising.
Next, on comparing with the industry net income growth, we found that the growth figure reported by Justin Allen Holdings compares quite favourably to the industry average, which shows a decline of 4.9% in the same 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. This then helps them determine if the stock is placed for a bright or bleak future. Is Justin Allen Holdings fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is Justin Allen Holdings Making Efficient Use Of Its Profits?
The three-year median payout ratio for Justin Allen Holdings is 38%, which is moderately low. The company is retaining the remaining 62%. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like Justin Allen Holdings is reinvesting its earnings efficiently.
While Justin Allen Holdings has been growing its earnings, it only recently started to pay dividends which likely means that the company decided to impress new and existing shareholders with a dividend.
In total, we are pretty happy with Justin Allen Holdings’ 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. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Let’s not forget, business risk is also one of the factors that affects the price of the stock. So this is also an important area that investors need to pay attention to before making a decision on any business. Our risks dashboard would have the 3 risks we have identified for Justin Allen Holdings.
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This article by Simply Wall St is general in nature. 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.
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