Jumbo Interactive Limited's (ASX:JIN) Stock Is Going Strong: Is the Market Following Fundamentals?

Jumbo Interactive's (ASX:JIN) stock is up by a considerable 21% over the past month. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. Specifically, we decided to study Jumbo Interactive'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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

Check out our latest analysis for Jumbo Interactive

How To Calculate Return On Equity?

Return on equity 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 Jumbo Interactive is:

33% = AU$26m ÷ AU$79m (Based on the trailing twelve months to June 2020).

The 'return' is the yearly profit. So, this means that for every A$1 of its shareholder's investments, the company generates a profit of A$0.33.

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. 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.

Jumbo Interactive's Earnings Growth And 33% ROE

To begin with, Jumbo Interactive has a pretty high ROE which is interesting. Secondly, even when compared to the industry average of 8.1% the company's ROE is quite impressive. Under the circumstances, Jumbo Interactive's considerable five year net income growth of 43% was to be expected.

Next, on comparing with the industry net income growth, we found that Jumbo Interactive's growth is quite high when compared to the industry average growth of 4.7% 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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Jumbo Interactive fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Jumbo Interactive Using Its Retained Earnings Effectively?

The high three-year median payout ratio of 82% (implying that it keeps only 18% of profits) for Jumbo Interactive suggests that the company's growth wasn't really hampered despite it returning most of the earnings to its shareholders.

Besides, Jumbo Interactive has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 82%. However, Jumbo Interactive's ROE is predicted to rise to 42% despite there being no anticipated change in its payout ratio.

Conclusion

Overall, we are quite pleased with Jumbo Interactive's performance. Especially the high ROE, Which has contributed to the impressive growth seen in earnings. Despite the company reinvesting only a small portion of its profits, it still has managed to grow its earnings so that is appreciable. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. 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. 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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