The fundamentals of the St. Joe Company (NYSE: JOE) look pretty strong: Could the market be wrong about the stock?

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With its shares down 6.8% in the past month, it’s easy to overlook St. Joe (NYSE: JOE). However, stock prices are usually determined by a company’s long-term financial data, which in this case looks pretty respectable. In this article, we’ve decided to focus on St. Joe’s ROE.

Return on equity or ROE is a test of how effectively a company increases its value and manages investor money. In other words, it reveals the company’s success in turning shareholders’ investments into profits.

How to calculate return on equity?

ROE can be calculated using the formula:

Return on equity = Net income (from continuing operations) ÷ Equity

So, based on the above formula, the ROE for St. Joe is:

9.3% = US $ 55 million ÷ US $ 589 million (based on the last twelve months to June 2021).

“Return” refers to a company’s profits over the past year. Another way to look at this is that for every dollar of equity, the company was able to make $ 0.09 in profit.

What is the relationship between ROE and profit growth?

We have already established that ROE is an effective indicator of profit generation for a company’s future profits. Based on the portion of its profits that the company chooses to reinvest or “keep”, we are then able to assess a company’s future ability to generate profits. Assuming everything else is equal, companies that have both a higher return on equity and higher profit retention are generally those that have a higher growth rate than companies that do not have the same characteristics.

A side-by-side comparison of St. Joe’s profit growth and 9.3% ROE

At first glance, St. Joe’s ROE doesn’t look very promising. However, its ROE is similar to the industry average of 9.3%, so we won’t dismiss the company completely. Despite this, St. Joe’s posted fairly decent net income growth which grew at a rate of 13%. Considering the moderately low ROE, it is quite possible that other aspects positively influence the company’s profit growth. For example, the business has a low payout ratio or is managed efficiently.

We then compared the net income growth of St. Joe’s with the industry and we are happy to see that the growth number of the company is higher than that of the industry which has a growth rate of 6, 4% over the same period.

NYSE: JOE Past Profit Growth September 29, 2021

The basis for attaching value to a business is, to a large extent, related to the growth of its profits. What investors next need to determine is whether the expected earnings growth, or lack thereof, is already built into the share price. This then helps them determine whether the stock is set for a bright or dark future. Is St. Joe’s fair compared to other companies? Those 3 valuation measures could help you decide.

Is St. Joe’s Efficient Use of Retained Earnings?

St. Joe’s three-year median payout ratio to shareholders is 18% (implying it keeps 82% of its revenue), which is lower, so it looks like management is heavily reinvesting earnings to develop his activity.

Although St. Joe’s has seen earnings growth, it wasn’t until recently that it started paying a dividend. It is very likely that the company has decided to impress new and existing shareholders with a dividend.

Conclusion

Overall, we think St. Joe has some positive attributes. Despite its low rate of return, the fact that the company reinvested a very large portion of its profits back into its business has undoubtedly contributed to the strong profit growth. While we don’t completely reject the business, what we would do is try to determine how risky the business is to make a more informed decision about the business. Our risk dashboard will have the 1 risk that we have identified for St. Joe.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative material. Simply Wall St has no position in the mentioned stocks.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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