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With its stock down 11% over the past month, it is easy to disregard Jet2 (LON:JET2). But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. Particularly, we will be paying attention to Jet2's 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 Jet2
How Is ROE Calculated?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Jet2 is:
28% = UK£496m ÷ UK£1.8b (Based on the trailing twelve months to September 2024).
The 'return' is the income the business earned over the last year. That means that for every £1 worth of shareholders' equity, the company generated £0.28 in profit.
What Is The Relationship Between ROE And 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 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.
A Side By Side comparison of Jet2's Earnings Growth And 28% ROE
Firstly, we acknowledge that Jet2 has a significantly high ROE. Additionally, a comparison with the average industry ROE of 28% also portrays the company's ROE in a good light. Therefore, it might not be wrong to say that the impressive five year 51% net income growth seen by Jet2 was probably achieved as a result of the high ROE.
Next, on comparing with the industry net income growth, we found that Jet2's growth is quite high when compared to the industry average growth of 42% in the same period, which is great to see.
Earnings growth is an important metric to consider when valuing a stock. 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 JET2 fairly valued? This infographic on the company's intrinsic value has everything you need to know.