Most readers would already be aware that Johns Lyng Group's (ASX:JLG) stock increased significantly by 29% over the past three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. In this article, we decided to focus on Johns Lyng Group's ROE.

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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View our latest analysis for Johns Lyng Group

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 Johns Lyng Group is:

12% = AU$38m ÷ AU$333m (Based on the trailing twelve months to June 2022).

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$0.12 in profit.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.

A Side By Side comparison of Johns Lyng Group's Earnings Growth And 12% ROE

To begin with, Johns Lyng Group seems to have a respectable ROE. Further, the company's ROE is similar to the industry average of 14%. This certainly adds some context to Johns Lyng Group's moderate 17% net income growth seen over the past five years.

As a next step, we compared Johns Lyng Group's 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 17% in the same period.

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. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Johns Lyng Group's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Johns Lyng Group Making Efficient Use Of Its Profits?

The high three-year median payout ratio of 58% (or a retention ratio of 42%) for Johns Lyng Group suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.