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JD Sports Fashion (LON:JD.) has had a rough month with its share price down 15%. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Particularly, we will be paying attention to JD Sports Fashion'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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.
Check out our latest analysis for JD Sports Fashion
How To Calculate Return On Equity?
The formula for return on equity is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for JD Sports Fashion is:
14% = UK£400m ÷ UK£2.8b (Based on the trailing twelve months to August 2024).
The 'return' is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each £1 of shareholders' capital it has, the company made £0.14 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 JD Sports Fashion's Earnings Growth And 14% ROE
To start with, JD Sports Fashion's ROE looks acceptable. Further, the company's ROE compares quite favorably to the industry average of 9.7%. Probably as a result of this, JD Sports Fashion was able to see a decent growth of 9.6% over the last five years.
As a next step, we compared JD Sports Fashion'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 11% 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. If you're wondering about JD Sports Fashion's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.