With its stock down 5.7% over the past three months, it is easy to disregard Johns Lyng Group (ASX:JLG). However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Specifically, we decided to study Johns Lyng Group's ROE in this article.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

Check out our latest analysis for Johns Lyng Group

How To Calculate Return On Equity?

The formula for return on equity is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Johns Lyng Group is:

13% = AU$60m ÷ AU$460m (Based on the trailing twelve months to December 2023).

The 'return' is the amount earned after tax over the last twelve months. So, this means that for every A$1 of its shareholder's investments, the company generates a profit of A$0.13.

What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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 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 Johns Lyng Group's Earnings Growth And 13% ROE

To begin with, Johns Lyng Group seems to have a respectable ROE. Further, the company's ROE is similar to the industry average of 13%. Consequently, this likely laid the ground for the impressive net income growth of 31% seen over the past five years by Johns Lyng Group. However, there could also be other drivers behind this growth. For instance, the company has a low payout ratio or is being managed efficiently.

As a next step, we compared Johns Lyng Group's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 21%.

Earnings growth is an important metric to consider when valuing a stock. 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. Is Johns Lyng Group fairly valued compared to other companies? These 3 valuation measures might help you decide.