Johnson Service Group (LON:JSG) has had a great run on the share market with its stock up by a significant 7.8% over the last month. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. Specifically, we decided to study Johnson Service Group's ROE in this article.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Check out our latest analysis for Johnson Service Group

How Is ROE Calculated?

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 Johnson Service Group is:

13% = UK￡34m ÷ UK￡269m (Based on the trailing twelve months to June 2023).

The 'return' is the income the business earned over the last year. So, this means that for every ￡1 of its shareholder's investments, the company generates a profit of ￡0.13.

What Has ROE Got To Do With Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

Johnson Service Group's Earnings Growth And 13% ROE

To begin with, Johnson Service Group seems to have a respectable ROE. Further, the company's ROE is similar to the industry average of 13%. For this reason, Johnson Service Group's five year net income decline of 3.2% raises the question as to why the decent ROE didn't translate into growth. So, there might be some other aspects that could explain this. These include low earnings retention or poor allocation of capital.

However, when we compared Johnson Service Group's growth with the industry we found that while the company's earnings have been shrinking, the industry has seen an earnings growth of 28% in the same period. This is quite worrisome.

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. Doing so will help them establish if the stock's future looks promising or ominous. Is JSG fairly valued? This infographic on the company's intrinsic value has everything you need to know.