Is JustSystems Corporation's (TSE:4686) Latest Stock Performance A Reflection Of Its Financial Health?

JustSystems' (TSE:4686) stock is up by a considerable 17% over the past three months. 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 JustSystems' ROE in this article.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Put another way, it reveals the company's success at turning shareholder investments into profits.

See our latest analysis for JustSystems

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 JustSystems is:

12% = JP¥12b ÷ JP¥97b (Based on the trailing twelve months to June 2024).

The 'return' is the yearly profit. That means that for every ¥1 worth of shareholders' equity, the company generated ¥0.12 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.

JustSystems' Earnings Growth And 12% ROE

To begin with, JustSystems seems to have a respectable ROE. Further, the company's ROE is similar to the industry average of 13%. This certainly adds some context to JustSystems' moderate 7.9% net income growth seen over the past five years.

Next, on comparing with the industry net income growth, we found that JustSystems' reported growth was lower than the industry growth of 12% over the last few years, which is not something we like to see.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. Has the market priced in the future outlook for 4686? You can find out in our latest intrinsic value infographic research report

Is JustSystems Using Its Retained Earnings Effectively?

JustSystems has a low three-year median payout ratio of 8.6%, meaning that the company retains the remaining 91% of its profits. This suggests that the management is reinvesting most of the profits to grow the business.

Moreover, JustSystems is determined to keep sharing its profits with shareholders which we infer from its long history of nine years of paying a dividend.

Conclusion

Overall, we are quite pleased with JustSystems' performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. As a result, the decent growth in its earnings is not surprising.

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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.