Stock Analysis

Joules Group Plc (LON:JOUL) Stock Is Going Strong But Fundamentals Look Uncertain: What Lies Ahead ?

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AIM:JOUL
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Joules Group (LON:JOUL) has had a great run on the share market with its stock up by a significant 46% over the last week. However, we decided to pay attention to the company's fundamentals which don't appear to give a clear sign about the company's financial health. Particularly, we will be paying attention to Joules Group's ROE today.

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.

Check out our latest analysis for Joules Group

How Is ROE Calculated?

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 Joules Group is:

3.8% = UK£2.0m ÷ UK£53m (Based on the trailing twelve months to November 2021).

The 'return' is the amount earned after tax over the last twelve months. So, this means that for every £1 of its shareholder's investments, the company generates a profit of £0.04.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.

Joules Group's Earnings Growth And 3.8% ROE

At first glance, Joules Group's ROE doesn't look very promising. Next, when compared to the average industry ROE of 21%, the company's ROE leaves us feeling even less enthusiastic. Therefore, it might not be wrong to say that the five year net income decline of 40% seen by Joules Group was probably the result of it having a lower ROE. We believe that there also might be other aspects that are negatively influencing the company's earnings prospects. For instance, the company has a very high payout ratio, or is faced with competitive pressures.

So, as a next step, we compared Joules Group's performance against the industry and were disappointed to discover that while the company has been shrinking its earnings, the industry has been growing its earnings at a rate of 2.7% in the same period.

past-earnings-growth
AIM:JOUL Past Earnings Growth August 9th 2022

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). Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Joules Group's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Joules Group Making Efficient Use Of Its Profits?

While the company did payout a portion of its dividend in the past, it currently doesn't pay a dividend. This implies that potentially all of its profits are being reinvested in the business.

Conclusion

In total, we're a bit ambivalent about Joules Group's performance. While the company does have a high rate of reinvestment, the low ROE means that all that reinvestment is not reaping any benefit to its investors, and moreover, its having a negative impact on the earnings growth. Wrapping up, we would proceed with caution with this company and one way of doing that would be to look at the risk profile of the business. To know the 4 risks we have identified for Joules Group visit our risks dashboard for free.

Valuation is complex, but we're helping make it simple.

Find out whether Joules Group is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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About AIM:JOUL

Joules Group

Joules Group Plc, together with its subsidiaries, designs and sells lifestyle clothing, related accessories, and home ware products under the Joules brand in the United Kingdom and internationally.

The Snowflake is a visual investment summary with the score of each axis being calculated by 6 checks in 5 areas.

Analysis AreaScore (0-6)
Valuation4
Future Growth0
Past Performance1
Financial Health4
Dividends0

Read more about these checks in the individual report sections or in our analysis model.

Good value with adequate balance sheet.