In This Article:
JB Hi-Fi (ASX:JBH) has had a great run on the share market with its stock up by a significant 5.7% over the last month. 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 JB Hi-Fi'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. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
View our latest analysis for JB Hi-Fi
How Is ROE Calculated?
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:
43% = AU$545m ÷ AU$1.3b (Based on the trailing twelve months to June 2022).
The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each A$1 of shareholders' capital it has, the company made A$0.43 in profit.
What Is The Relationship Between ROE And Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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 43% ROE
To begin with, JB Hi-Fi has a pretty high ROE which is interesting. Secondly, even when compared to the industry average of 21% the company's ROE is quite impressive. 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 performed a comparison between JB Hi-Fi's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 21% in the same period.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. What is JBH worth today? The intrinsic value infographic in our free research report helps visualize whether JBH is currently mispriced by the market.