Shine Justice (ASX:SHJ) has had a great run on the share market with its stock up by a significant 27% over the last three months. 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. Particularly, we will be paying attention to Shine Justice’s ROE today.
ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company’s shareholders.
How Is ROE Calculated?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity
So, based on the above formula, the ROE for Shine Justice is:
10% = AU$26m ÷ AU$255m (Based on the trailing twelve months to June 2021).
The ‘return’ is the income the business earned over the last year. One way to conceptualize this is that for each A$1 of shareholders’ capital it has, the company made A$0.10 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. 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. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don’t necessarily bear these characteristics.
A Side By Side comparison of Shine Justice’s Earnings Growth And 10% ROE
At first glance, Shine Justice seems to have a decent ROE. Even when compared to the industry average of 10% the company’s ROE looks quite decent. This certainly adds some context to Shine Justice’s moderate 5.6% net income growth seen over the past five years.
We then compared Shine Justice’s net income growth with the industry and found that the company’s growth figure is lower than the average industry growth rate of 12% in the same period, which is a bit concerning.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you’re wondering about Shine Justice’s’s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Shine Justice Making Efficient Use Of Its Profits?
With a three-year median payout ratio of 36% (implying that the company retains 64% of its profits), it seems that Shine Justice is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that’s well covered.
Additionally, Shine Justice has paid dividends over a period of eight 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 33%. As a result, Shine Justice’s ROE is not expected to change by much either, which we inferred from the analyst estimate of 11% for future ROE.
Overall, we are quite pleased with Shine Justice’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 latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.
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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