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Watkin Jones Plc's (LON:WJG) Stock Has Been Sliding But Fundamentals Look Strong: Is The Market Wrong?

With its stock down 7.5% over the past three months, it is easy to disregard Watkin Jones (LON:WJG). But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. In this article, we decided to focus on Watkin Jones' ROE.

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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

View our latest analysis for Watkin Jones

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 Watkin Jones is:

26% = UK£44m ÷ UK£169m (Based on the trailing twelve months to March 2020).

The 'return' is the yearly profit. That means that for every £1 worth of shareholders' equity, the company generated £0.26 in profit.

Why Is ROE Important For 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 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.

Watkin Jones' Earnings Growth And 26% ROE

First thing first, we like that Watkin Jones has an impressive ROE. Additionally, the company's ROE is higher compared to the industry average of 7.3% which is quite remarkable. So, the substantial 25% net income growth seen by Watkin Jones over the past five years isn't overly surprising.

We then compared Watkin Jones' net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 4.6% in the same period.

past-earnings-growth
past-earnings-growth

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. Is WJG fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Watkin Jones Efficiently Re-investing Its Profits?

While the company did pay out a portion of its dividend in the past, it currently doesn't pay a dividend. This is likely what's driving the high earnings growth number discussed above.

Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 46%. Regardless, Watkin Jones' ROE is speculated to decline to 8.9% despite there being no anticipated change in its payout ratio.

Conclusion

On the whole, we feel that Watkin Jones' performance has been quite good. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

This article by Simply Wall St is general in nature. 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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