Johnson Outdoors (NASDAQ: JOUT) has had a good run in the stock market with its stock rising by a significant 47% over the last three months. Given the company’s impressive performance, we decided to examine its financial indicators in more detail, as a company’s long – term financial health usually dictates market performance. Specifically, we decided to study Johnson Outdoors’ ROE in this article.
Return on equity or ROE is a key measure used to assess how effectively a company’s management uses the company’s capital. Put another way, it reveals the company’s success in turning shareholder investment into profit.
How is ROE calculated?
That formula for return on equity is:
Return on equity = Net profit (from continuing operations) ÷ Equity
So based on the above formula, ROE for Johnson Outdoors is:
17% = US $ 69m ÷ US $ 399m (Based on the subsequent twelve months to January 2021).
The ‘return’ is the profit for the last twelve months. So that means that for every $ 1 of the shareholder’s investment, the company generates a profit of $ 0.17.
What does ROE have to do with earnings growth?
We have already established that ROE acts as an effective profit-generating gauge for a company’s future earnings. We must now evaluate how much profit the company reinvests or “preserves” for future growth, which then gives us an idea of the company’s growth potential. If everything else being equal, companies that have both a higher return on equity and higher profits are usually the ones that have a higher growth rate compared to companies that do not have the same features.
Johnson Outdoors’ earnings growth and 17% ROE
To begin with, Johnson Outdoors seems to have a respectable ROE. And when comparing with the industry, we found that the average ROE in the industry equals 17%. Therefore, this probably laid the groundwork for the impressive net income growth of 25% seen over the past five years by Johnson Outdoors. We believe that there may also be other aspects that have a positive impact on the company’s earnings growth. For example, the company has a low payout ratio or is managed efficiently.
Next, when we compared with the industry’s net income growth, we found that Johnson Outdoors’ growth is quite high compared to the industry’s average growth of 7.4% over the same period, which is nice to see.
Earnings growth is a huge factor in the valuation of stocks. The investor should try to determine if the expected growth or decline in earnings, as the case may be, is priced. By doing so, they will have an idea of whether the stock is heading out into clear blue waters, or if swampy waters await. If you’ve wondering about Johnson Outdoors’ valuation, check it out this measure of the price-to-earnings ratio, compared to its industry.
Does Johnson Outdoors use its retained earnings effectively?
Johnson Outdoors’ three-year median payout ratio is on the lower side at 12%, suggesting that it retains a higher percentage (88%) of its profits. This suggests that management is reinvesting most of its profits to grow the business, as evidenced by the growth that the company has seen.
In addition, Johnson Outdoors has paid dividends over a period of seven years. This shows that the company is required to share profits with its shareholders.
All in all, we feel that Johnson Outdoors’ performance has been pretty good. In particular, we like that the company is reinvesting heavily in its business and with a high return. Not surprisingly, this has led to an impressive growth in earnings. When that is the case, a survey of recent analyst forecasts shows that the company is expected to see a slowdown in its future earnings growth. To learn more about the latest analysts’ predictions for the company, check this out visualization of analysts’ forecasts for the company.
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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any shares and does not take into account your goals or your financial situation. We strive to provide you with long-term focused analysis driven by basic data. Please note that our analysis may not include the latest price sensitive company announcements or qualitative material. Simply Wall St has no position in the mentioned stocks.
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