JB Hi-Fi Limited (ASX:JBH) Stock Has Shown Weakness Lately But Financials Look Strong: Should Prospective Shareholders Make The Leap?

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Simply Wall St

Mon, May 30, 2022, 7:54 PM 4 min read

It is hard to get excited after looking at JB Hi-Fi's (ASX:JBH) recent performance, when its stock has declined 12% over the past month. 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 JB Hi-Fi'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.

See our latest analysis for JB Hi-Fi

How Do You Calculate Return On Equity?

ROE can be calculated by using the formula:

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

So, based on the above formula, the ROE for JB Hi-Fi is:

33% = AU$476m ÷ AU$1.5b (Based on the trailing twelve months to December 2021).

The 'return' is the yearly profit. One way to conceptualize this is that for each A$1 of shareholders' capital it has, the company made A$0.33 in profit.

What Is The Relationship Between ROE And 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 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.

A Side By Side comparison of JB Hi-Fi's Earnings Growth And 33% ROE

To begin with, JB Hi-Fi has a pretty high ROE which is interesting. Additionally, the company's ROE is higher compared to the industry average of 21% which is quite remarkable. As a result, JB Hi-Fi's exceptional 23% net income growth seen over the past five years, doesn't come as a surprise.

We then compared JB Hi-Fi's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 18% in the same period.

past-earnings-growth — ASX:JBH Past Earnings Growth May 31st 2022

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is JBH fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is JB Hi-Fi Efficiently Re-investing Its Profits?

JB Hi-Fi has a significant three-year median payout ratio of 66%, meaning the company only retains 34% of its income. This implies that the company has been able to achieve high earnings growth despite returning most of its profits to shareholders.

Additionally, JB Hi-Fi has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. 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 66%. As a result, JB Hi-Fi's ROE is not expected to change by much either, which we inferred from the analyst estimate of 28% for future ROE.

Conclusion

On the whole, we feel that JB Hi-Fi's performance has been quite good. We are particularly impressed by the considerable earnings growth posted by the company, which was likely backed by its high ROE. While the company is paying out most of its earnings as dividends, it has been able to grow its earnings in spite of it, so that's probably a good sign. That being so, according to the latest industry analyst forecasts, the company's earnings are expected to shrink in the future. 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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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.