Weak Financial Prospects Seem To Be Dragging Down J&J Snack Foods Corp. (NASDAQ:JJSF) Stock

With its stock down 2.4% over the past month, it is easy to disregard J&J Snack Foods (NASDAQ:JJSF). We decided to study the company's financials to determine if the downtrend will continue as the long-term performance of a company usually dictates market outcomes. Particularly, we will be paying attention to J&J Snack Foods' ROE today.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for J&J Snack Foods

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 J&J Snack Foods is:

9.3% = US$87m ÷ US$938m (Based on the trailing twelve months to June 2024).

The 'return' is the yearly profit. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.09.

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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.

J&J Snack Foods' Earnings Growth And 9.3% ROE

At first glance, J&J Snack Foods' ROE doesn't look very promising. A quick further study shows that the company's ROE doesn't compare favorably to the industry average of 14% either. Accordingly, J&J Snack Foods' low net income growth of 3.2% over the past five years can possibly be explained by the low ROE amongst other factors.

As a next step, we compared J&J Snack Foods' net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 8.2% in the same period.

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

Is J&J Snack Foods Making Efficient Use Of Its Profits?

With a high three-year median payout ratio of 80% (or a retention ratio of 20%), most of J&J Snack Foods' profits are being paid to shareholders. This definitely contributes to the low earnings growth seen by the company.

In addition, J&J Snack Foods has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth.

Conclusion

Overall, we would be extremely cautious before making any decision on J&J Snack Foods. The company has seen a lack of earnings growth as a result of retaining very little profits and whatever little it does retain, is being reinvested at a very low rate of return. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. 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. 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.