Johnson Outdoors Inc. (NASDAQ:JOUT) Stock Has Shown Weakness Lately But Financials Look Strong: Should Prospective Shareholders Make The Leap?

By
Simply Wall St
Published
May 10, 2022
NasdaqGS:JOUT
Source: Shutterstock

With its stock down 25% over the past three months, it is easy to disregard Johnson Outdoors (NASDAQ:JOUT). 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 Johnson Outdoors' ROE today.

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.

See our latest analysis for Johnson Outdoors

How Do You 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 Johnson Outdoors is:

16% = US$74m ÷ US$467m (Based on the trailing twelve months to April 2022).

The 'return' is the yearly profit. That means that for every $1 worth of shareholders' equity, the company generated $0.16 in profit.

What Has ROE Got To Do With Earnings Growth?

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

Johnson Outdoors' Earnings Growth And 16% ROE

At first glance, Johnson Outdoors seems to have a decent ROE. Even so, when compared with the average industry ROE of 29%, we aren't very excited. Still, we can see that Johnson Outdoors has seen a remarkable net income growth of 22% over the past five years. Therefore, there could be other causes behind this growth. Such as - high earnings retention or an efficient management in place. Bear in mind, the company does have a respectable ROE. It is just that the industry ROE is higher. So this certainly also provides some context to the high earnings growth seen by the company.

As a next step, we compared Johnson Outdoors' 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 25% in the same period.

past-earnings-growth
NasdaqGS:JOUT Past Earnings Growth May 10th 2022

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). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Johnson Outdoors fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Johnson Outdoors Efficiently Re-investing Its Profits?

Johnson Outdoors has a really low three-year median payout ratio of 11%, meaning that it has the remaining 89% left over to reinvest into its business. This suggests that the management is reinvesting most of the profits to grow the business as evidenced by the growth seen by the company.

Besides, Johnson Outdoors has been paying dividends over a period of nine years. This shows that the company is committed to sharing profits with its shareholders.

Summary

On the whole, we feel that Johnson Outdoors' performance has been quite good. In particular, it's great to see that the company has seen significant growth in its earnings backed by a respectable ROE and a high reinvestment rate. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. 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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