Declining Stock and Solid Fundamentals: Is The Market Wrong About Jet2 plc (LON:JET2)?

It is hard to get excited after looking at Jet2's (LON:JET2) recent performance, when its stock has declined 8.2% over the past three months. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Particularly, we will be paying attention to Jet2's ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

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How Is ROE Calculated?

The formula for ROE is:

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

So, based on the above formula, the ROE for Jet2 is:

28% = UK£496m ÷ UK£1.8b (Based on the trailing twelve months to September 2024).

The 'return' is the income the business earned over the last year. Another way to think of that is that for every £1 worth of equity, the company was able to earn £0.28 in profit.

View our latest analysis for Jet2

What Is The Relationship Between ROE And Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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. 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.

Jet2's Earnings Growth And 28% ROE

To begin with, Jet2 has a pretty high ROE which is interesting. Even when compared to the industry average of 23% the company's ROE is pretty decent. Therefore, it might not be wrong to say that the impressive five year 51% net income growth seen by Jet2 was probably achieved as a result of the high ROE.

As a next step, we compared Jet2's net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 52% 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). Doing so will help them establish if the stock's future looks promising or ominous. What is JET2 worth today? The intrinsic value infographic in our free research report helps visualize whether JET2 is currently mispriced by the market.

Is Jet2 Efficiently Re-investing Its Profits?

Jet2 has a really low three-year median payout ratio of 6.7%, meaning that it has the remaining 93% left over to reinvest into its business. So it looks like Jet2 is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Moreover, Jet2 is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 7.2% of its profits over the next three years. However, Jet2's future ROE is expected to decline to 21% despite there being not much change anticipated in the company's payout ratio.

Summary

On the whole, we feel that Jet2's performance has been quite good. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. 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. 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. 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.