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It is hard to get excited after looking at Judges Scientific's (LON:JDG) recent performance, when its stock has declined 17% over the past three months. However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. In this article, we decided to focus on Judges Scientific's ROE.
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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
See our latest analysis for Judges Scientific
How To Calculate Return On Equity?
Return on equity 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 Judges Scientific is:
15% = UK£13m ÷ UK£87m (Based on the trailing twelve months to June 2024).
The 'return' is the yearly profit. That means that for every £1 worth of shareholders' equity, the company generated £0.15 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 Judges Scientific's Earnings Growth And 15% ROE
To start with, Judges Scientific's ROE looks acceptable. Further, the company's ROE is similar to the industry average of 14%. Despite the modest returns, Judges Scientific's five year net income growth was quite low, averaging at only 2.6%. We reckon that a low growth, when returns are moderate could be the result of certain circumstances like low earnings retention or poor allocation of capital.
Next, on comparing with the industry net income growth, we found that Judges Scientific's reported growth was lower than the industry growth of 9.3% over the last few years, which is not something we like 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). This then helps them determine if the stock is placed for a bright or bleak future. Is JDG fairly valued? This infographic on the company's intrinsic value has everything you need to know.