Has Jewett-Cameron Trading Company Ltd. (NASDAQ:JCTC.F) Stock's Recent Performance Got Anything to Do With Its Financial Health?

Jewett-Cameron Trading's (NASDAQ:JCTC.F) stock is up by 5.4% over the past three months. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. Particularly, we will be paying attention to Jewett-Cameron Trading'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 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 Jewett-Cameron Trading

How Do You Calculate Return On Equity?

The formula for ROE is:

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

So, based on the above formula, the ROE for Jewett-Cameron Trading is:

14% = US$2.8m ÷ US$19m (Based on the trailing twelve months to August 2020).

The 'return' is the yearly profit. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.14.

What Has ROE Got To Do With 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. 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.

A Side By Side comparison of Jewett-Cameron Trading's Earnings Growth And 14% ROE

To begin with, Jewett-Cameron Trading seems to have a respectable ROE. Be that as it may, the company's ROE is still quite lower than the industry average of 18%. On further research, we found that Jewett-Cameron Trading's earnings over the past five years have been pretty flat. Not to forget, the company does have a decent ROE to begin with, just that it is lower than the industry average. So there might be other reasons for the flat earnings growth. These include low earnings retention or poor capital allocation.

We then compared Jewett-Cameron Trading's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 5.9% in the same period, which is a bit concerning.

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Jewett-Cameron Trading is trading on a high P/E or a low P/E, relative to its industry.

Is Jewett-Cameron Trading Efficiently Re-investing Its Profits?

Summary

Overall, we feel that Jewett-Cameron Trading certainly does have some positive factors to consider. Yet, the low earnings growth is a bit concerning, especially given that the company has a respectable rate of return and is reinvesting a huge portion of its profits. By the looks of it, there could be some other factors, not necessarily in control of the business, that's preventing growth. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. You can do your own research on Jewett-Cameron Trading and see how it has performed in the past by looking at this FREE detailed graph of past earnings, revenue and cash flows.

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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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