26-02-2025
Declining Stock and Solid Fundamentals: Is The Market Wrong About Jumbo Group Limited (Catalist:42R)?
With its stock down 1.8% over the past month, it is easy to disregard Jumbo Group (Catalist:42R). However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Specifically, we decided to study Jumbo Group's ROE in this article.
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.
See our latest analysis for Jumbo Group
ROE 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 Jumbo Group is:
23% = S$12m ÷ S$52m (Based on the trailing twelve months to September 2024).
The 'return' refers to a company's earnings over the last year. That means that for every SGD1 worth of shareholders' equity, the company generated SGD0.23 in profit.
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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.
To begin with, Jumbo Group has a pretty high ROE which is interesting. Second, a comparison with the average ROE reported by the industry of 5.2% also doesn't go unnoticed by us. So, the substantial 34% net income growth seen by Jumbo Group over the past five years isn't overly surprising.
Next, on comparing with the industry net income growth, we found that Jumbo Group's growth is quite high when compared to the industry average growth of 21% in the same period, which is great to see.
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. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Jumbo Group's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Jumbo Group's significant three-year median payout ratio of 53% (where it is retaining only 47% of its income) suggests that the company has been able to achieve a high growth in earnings despite returning most of its income to shareholders.
Moreover, Jumbo Group is determined to keep sharing its profits with shareholders which we infer from its long history of eight years of paying a dividend.
Overall, we are quite pleased with Jumbo Group's performance. In particular, its high ROE is quite noteworthy and also the probable explanation behind its considerable earnings growth. Yet, the company is retaining a small portion of its profits. Which means that the company has been able to grow its earnings in spite of it, so that's not too bad. Up till now, we've only made a short study of the company's growth data. To gain further insights into Jumbo Group's past profit growth, check out this visualization of past earnings, revenue and cash flows.
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