JS Global Lifestyle (HKG:1691) has had a rough three months with its share price down 3.4%. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Particularly, we will be paying attention to JS Global Lifestyle’s ROE today.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder’s equity.
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 JS Global Lifestyle is:
21% = US$402m ÷ US$1.9b (Based on the trailing twelve months to December 2020).
The ‘return’ is the income the business earned over the last year. Another way to think of that is that for every HK$1 worth of equity, the company was able to earn HK$0.21 in profit.
What Is The Relationship Between ROE And Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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. 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.
JS Global Lifestyle’s Earnings Growth And 21% ROE
To start with, JS Global Lifestyle’s ROE looks acceptable. On comparing with the average industry ROE of 14% the company’s ROE looks pretty remarkable. Probably as a result of this, JS Global Lifestyle was able to see an impressive net income growth of 53% over the last five years. We believe that there might also be other aspects that are positively influencing the company’s earnings growth. For instance, the company has a low payout ratio or is being managed efficiently.
We then compared JS Global Lifestyle’s net income growth with the industry and we’re pleased to see that the company’s growth figure is higher when compared with the industry which has a growth rate of 5.7% in the same period.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Has the market priced in the future outlook for 1691? You can find out in our latest intrinsic value infographic research report.
Is JS Global Lifestyle Efficiently Re-investing Its Profits?
The three-year median payout ratio for JS Global Lifestyle is 33%, which is moderately low. The company is retaining the remaining 67%. By the looks of it, the dividend is well covered and JS Global Lifestyle is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.
Our latest analyst data shows that the future payout ratio of the company is expected to drop to 26% over the next three years. Despite the lower expected payout ratio, the company’s ROE is not expected to change by much.
Overall, we are quite pleased with JS Global Lifestyle’s performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. Having said that, the company’s earnings growth is expected to slow down, as forecasted in the current analyst estimates. To know more about the company’s future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.
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