Jerónimo Martins, SGPS, S.A.'s (ELI:JMT) Stock Is Going Strong: Have Financials A Role To Play?

By
Simply Wall St
Published
October 31, 2021
ENXTLS:JMT
Source: Shutterstock

Jerónimo Martins SGPS' (ELI:JMT) stock is up by a considerable 14% over the past three months. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. Particularly, we will be paying attention to Jerónimo Martins SGPS' ROE today.

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. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

View our latest analysis for Jerónimo Martins SGPS

How To Calculate Return On Equity?

The formula for return on equity is:

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

So, based on the above formula, the ROE for Jerónimo Martins SGPS is:

18% = €437m ÷ €2.4b (Based on the trailing twelve months to September 2021).

The 'return' refers to a company's earnings over the last year. That means that for every €1 worth of shareholders' equity, the company generated €0.18 in profit.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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.

Jerónimo Martins SGPS' Earnings Growth And 18% ROE

To begin with, Jerónimo Martins SGPS seems to have a respectable ROE. Especially when compared to the industry average of 14% the company's ROE looks pretty impressive. As you might expect, the 10% net income decline reported by Jerónimo Martins SGPS is a bit of a surprise. Based on this, we feel that there might be other reasons which haven't been discussed so far in this article that could be hampering the company's growth. These include low earnings retention or poor allocation of capital.

So, as a next step, we compared Jerónimo Martins SGPS' 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 7.3% in the same period.

past-earnings-growth
ENXTLS:JMT Past Earnings Growth November 1st 2021

Earnings growth is an important metric to consider when valuing a stock. 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. Is JMT fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Jerónimo Martins SGPS Using Its Retained Earnings Effectively?

Jerónimo Martins SGPS has a high three-year median payout ratio of 52% (that is, it is retaining 48% of its profits). This suggests that the company is paying most of its profits as dividends to its shareholders. This goes some way in explaining why its earnings have been shrinking. With only a little being reinvested into the business, earnings growth would obviously be low or non-existent.

Additionally, Jerónimo Martins SGPS has paid dividends over a period of at least ten years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth. 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 51%. Therefore, the company's future ROE is also not expected to change by much with analysts predicting an ROE of 22%.

Conclusion

In total, it does look like Jerónimo Martins SGPS has some positive aspects to its business. However, while the company does have a high ROE, its earnings growth number is quite disappointing. This can be blamed on the fact that it reinvests only a small portion of its profits and pays out the rest as dividends. That being so, the latest industry analyst forecasts show that the analysts are expecting to see a huge improvement in the company's earnings growth rate. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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