Does The Market Have A Low Tolerance For JBG SMITH Properties’ (NYSE:JBGS) Mixed Fundamentals?

With its stock down 12% over the past three months, it is easy to disregard JBG SMITH Properties (NYSE:JBGS). It seems that the market might have completely ignored the positive aspects of the company’s fundamentals and decided to weigh-in more on the negative aspects. Stock prices are usually driven by a company’s financial performance over the long term, and therefore we decided to pay more attention to the company’s financial performance. Specifically, we decided to study JBG SMITH Properties’ 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.

View our latest analysis for JBG SMITH Properties

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 JBG SMITH Properties is:

1.5% = US$57m ÷ US$3.9b (Based on the trailing twelve months to June 2020).

The ‘return’ refers to a company’s earnings over the last year. So, this means that for every $1 of its shareholder’s investments, the company generates a profit of $0.01.

Why Is ROE Important For 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 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.

JBG SMITH Properties’ Earnings Growth And 1.5% ROE

It is hard to argue that JBG SMITH Properties’ ROE is much good in and of itself. Even when compared to the industry average of 5.0%, the ROE figure is pretty disappointing. JBG SMITH Properties was still able to see a decent net income growth of 9.0% over the past five years. Therefore, the growth in earnings could probably have been caused by other variables. For instance, the company has a low payout ratio or is being managed efficiently.

Next, on comparing with the industry net income growth, we found that JBG SMITH Properties’ reported growth was lower than the industry growth of 14% in the same period, which is not something we like to see.

past-earnings-growth
NYSE:JBGS Past Earnings Growth September 21st 2020

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

Is JBG SMITH Properties Efficiently Re-investing Its Profits?

JBG SMITH Properties has a high three-year median payout ratio of 73%. This means that it has only 27% of its income left to reinvest into its business. However, it’s not unusual to see a REIT with such a high payout ratio mainly due to statutory requirements. Despite this, the company’s earnings grew moderately as we saw above.

Besides, JBG SMITH Properties has been paying dividends over a period of three years. This shows that the company is committed to sharing profits with its shareholders.

Conclusion

Overall, we have mixed feelings about JBG SMITH Properties. While the company has posted a decent earnings growth, We do feel that the earnings growth number could have been even higher, had the company been reinvesting more of its earnings at a higher rate of return. With that said, on studying the latest analyst forecasts, we found that while the company has seen growth in its past earnings, analysts expect its future earnings to shrink. 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. 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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