With its stock down 25% over the past three months, it is easy to disregard Jumbo Interactive (ASX:JIN). But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. Specifically, we decided to study Jumbo Interactive's ROE in this article.

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. Put another way, it reveals the company's success at turning shareholder investments into profits.

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 Jumbo Interactive is:

36% = AU$41m ÷ AU$115m (Based on the trailing twelve months to December 2024).

The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each A$1 of shareholders' capital it has, the company made A$0.36 in profit.

View our latest analysis for Jumbo Interactive

What Is The Relationship Between ROE And Earnings Growth?

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 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.

Jumbo Interactive's Earnings Growth And 36% ROE

First thing first, we like that Jumbo Interactive has an impressive ROE. Additionally, the company's ROE is higher compared to the industry average of 9.1% which is quite remarkable. Probably as a result of this, Jumbo Interactive was able to see a decent net income growth of 10% over the last five years.

Next, on comparing with the industry net income growth, we found that Jumbo Interactive's reported growth was lower than the industry growth of 41% over the last few years, which is not something we like to see.

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. Is JIN fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Jumbo Interactive Using Its Retained Earnings Effectively?

Jumbo Interactive has a significant three-year median payout ratio of 85%, meaning that it is left with only 15% to reinvest into its business. This implies that the company has been able to achieve decent earnings growth despite returning most of its profits to shareholders.

Moreover, Jumbo Interactive is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 85% of its profits over the next three years. As a result, Jumbo Interactive's ROE is not expected to change by much either, which we inferred from the analyst estimate of 42% for future ROE.

Conclusion

In total, it does look like Jumbo Interactive has some positive aspects to its business. Its earnings growth is decent, and the high ROE does contribute to that growth. However, investors could have benefitted even more from the high ROE, had the company been reinvesting more of its earnings. We also studied the latest analyst forecasts and found that the company's earnings growth is expected be similar to its current growth rate. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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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.