Yahoo Finance Are Robust Financials Driving The Recent Rally In JD Sports Fashion Plc's (LON:JD.) Stock?
Most readers would already be aware that JD Sports Fashion's (LON:JD.) stock increased significantly by 14% over the past month. 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. In this article, we decided to focus on JD Sports Fashion's ROE.
Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Put another way, it reveals the company's success at turning shareholder investments into profits.
View our latest analysis for JD Sports Fashion
How Do You 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 JD Sports Fashion is:
21% = UK£605m ÷ UK£2.9b (Based on the trailing twelve months to February 2024).
The 'return' is the profit over the last twelve months. Another way to think of that is that for every £1 worth of equity, the company was able to earn £0.21 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. 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. 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.
JD Sports Fashion's Earnings Growth And 21% ROE
To begin with, JD Sports Fashion seems to have a respectable ROE. Further, the company's ROE compares quite favorably to the industry average of 16%. This certainly adds some context to JD Sports Fashion's decent 6.4% net income growth seen over the past five years.
Next, on comparing with the industry net income growth, we found that JD Sports Fashion's reported growth was lower than the industry growth of 15% over the last few years, which is not something we like to see.
Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. Is JD. fairly valued? This infographic on the company's intrinsic value has everything you need to know.
Is JD Sports Fashion Efficiently Re-investing Its Profits?
JD Sports Fashion's three-year median payout ratio to shareholders is 8.1% (implying that it retains 92% of its income), which is on the lower side, so it seems like the management is reinvesting profits heavily to grow its business.
Additionally, JD Sports Fashion has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 8.5%. Therefore, the company's future ROE is also not expected to change by much with analysts predicting an ROE of 18%.
Conclusion
In total, we are pretty happy with JD Sports Fashion's performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. As a result, the decent growth in its earnings is not surprising. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. 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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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.
