Just Life Group Limited's (NZSE:JLG) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?
It is hard to get excited after looking at Just Life Group's (NZSE:JLG) recent performance, when its stock has declined 23% over the past three months. However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. In this article, we decided to focus on Just Life Group's ROE.
Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
Check out our latest analysis for Just Life Group
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 Just Life Group is:
8.0% = NZ$2.2m ÷ NZ$28m (Based on the trailing twelve months to June 2022).
The 'return' is the profit over the last twelve months. One way to conceptualize this is that for each NZ$1 of shareholders' capital it has, the company made NZ$0.08 in profit.
Why Is ROE Important For Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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 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.
Just Life Group's Earnings Growth And 8.0% ROE
When you first look at it, Just Life Group's ROE doesn't look that attractive. We then compared the company's ROE to the broader industry and were disappointed to see that the ROE is lower than the industry average of 11%. Just Life Group was still able to see a decent net income growth of 9.9% over the past five years. So, there might be other aspects that are positively influencing the company's earnings growth. Such as - high earnings retention or an efficient management in place.
Next, on comparing with the industry net income growth, we found that Just Life Group's growth is quite high when compared to the industry average growth of 7.0% in the same period, which is great 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). Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Just Life Group's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Just Life Group Efficiently Re-investing Its Profits?
The high three-year median payout ratio of 70% (or a retention ratio of 30%) for Just Life Group suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.
Moreover, Just Life Group is determined to keep sharing its profits with shareholders which we infer from its long history of five years of paying a dividend.
Summary
On the whole, we do feel that Just Life Group has some positive attributes. While no doubt its earnings growth is pretty substantial, we do feel that the reinvestment rate is pretty low, meaning, the earnings growth number could have been significantly higher had the company been retaining more of its profits. So far, we've only made a quick discussion around the company's earnings growth. So it may be worth checking this free detailed graph of Just Life Group's past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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