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Watkin Jones (LON:WJG) has had a great run on the share market with its stock up by a significant 31% over the last three months. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. Particularly, we will be paying attention to Watkin Jones' 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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.
View our latest analysis for Watkin Jones
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 Watkin Jones is:
13% = UK£21m ÷ UK£168m (Based on the trailing twelve months to September 2020).
The 'return' is the amount earned after tax over the last twelve months. So, this means that for every £1 of its shareholder's investments, the company generates a profit of £0.13.
What Has ROE Got To Do With 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. 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 Watkin Jones' Earnings Growth And 13% ROE
To start with, Watkin Jones' ROE looks acceptable. Especially when compared to the industry average of 6.5% the company's ROE looks pretty impressive. Probably as a result of this, Watkin Jones was able to see a decent growth of 17% over the last five years.
As a next step, we compared Watkin Jones' net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 0.7%.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. Is WJG fairly valued? This infographic on the company's intrinsic value has everything you need to know.