JB Hi-Fi Limited's (ASX:JBH) Stock's On An Uptrend: Are Strong Financials Guiding The Market?

JB Hi-Fi (ASX:JBH) has had a great run on the share market with its stock up by a significant 5.6% over the last 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. In this article, we decided to focus on JB Hi-Fi's 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. Put another way, it reveals the company's success at turning shareholder investments into profits.

View our latest analysis for JB Hi-Fi

How Do You Calculate Return On Equity?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for JB Hi-Fi is:

41% = AU$587m ÷ AU$1.4b (Based on the trailing twelve months to December 2022).

The 'return' is the profit over the last twelve months. So, this means that for every A$1 of its shareholder's investments, the company generates a profit of A$0.41.

What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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 everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

JB Hi-Fi's Earnings Growth And 41% 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 20% which is quite remarkable. So, the substantial 23% net income growth seen by JB Hi-Fi over the past five years isn't overly surprising.

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 21% in the same period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. What is JBH worth today? The intrinsic value infographic in our free research report helps visualize whether JBH is currently mispriced by the market.

Is JB Hi-Fi Efficiently Re-investing Its Profits?

The high three-year median payout ratio of 66% (implying that it keeps only 34% of profits) for JB Hi-Fi suggests that the company's growth wasn't really hampered despite it returning most of the earnings to its shareholders.

Besides, JB Hi-Fi has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 65% of its profits over the next three years. Regardless, JB Hi-Fi's ROE is speculated to decline to 24% despite there being no anticipated change in its payout ratio.

Summary

In total, we are pretty happy 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. Having said that, on studying current analyst estimates, we were concerned to see that while the company has grown its earnings in the past, analysts expect its earnings to shrink in the future. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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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.