JNBY Design Limited's (HKG:3306) Stock Is Going Strong: Is the Market Following Fundamentals?

Most readers would already be aware that JNBY Design's (HKG:3306) stock increased significantly by 55% over the past three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. In this article, we decided to focus on JNBY Design'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. 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 JNBY Design

How To Calculate Return On Equity?

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 JNBY Design is:

23% = CN¥380m ÷ CN¥1.7b (Based on the trailing twelve months to December 2020).

The 'return' is the amount earned after tax over the last twelve months. Another way to think of that is that for every HK$1 worth of equity, the company was able to earn HK$0.23 in profit.

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.

A Side By Side comparison of JNBY Design's Earnings Growth And 23% ROE

Firstly, we acknowledge that JNBY Design has a significantly high ROE. Secondly, even when compared to the industry average of 7.3% the company's ROE is quite impressive. This probably laid the groundwork for JNBY Design's moderate 11% net income growth seen over the past five years.

Given that the industry shrunk its earnings at a rate of 2.2% in the same period, the net income growth of the company is quite impressive.

Earnings growth is a huge factor in stock valuation. 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. Has the market priced in the future outlook for 3306? You can find out in our latest intrinsic value infographic research report.

Is JNBY Design Making Efficient Use Of Its Profits?

While JNBY Design has a three-year median payout ratio of 73% (which means it retains 27% of profits), the company has still seen a fair bit of earnings growth in the past, meaning that its high payout ratio hasn't hampered its ability to grow.

Additionally, JNBY Design has paid dividends over a period of three years which means that the company is pretty serious about sharing its profits with shareholders. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 76%. Still, forecasts suggest that JNBY Design's future ROE will rise to 32% even though the the company's payout ratio is not expected to change by much.

Summary

Overall, we are quite pleased with JNBY Design'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. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. 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. 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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