Most readers would already be aware that John B. Sanfilippo & Son's (NASDAQ:JBSS) stock increased significantly by 12% over the past week. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. In this article, we decided to focus on John B. Sanfilippo & Son's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors' money. Put another way, it reveals the company's success at turning shareholder investments into profits.

See our latest analysis for John B. Sanfilippo & Son

How Do You Calculate Return On Equity?

Return on equity can be calculated by using the formula:

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

So, based on the above formula, the ROE for John B. Sanfilippo & Son is:

22% = US$62m ÷ US$279m (Based on the trailing twelve months to June 2022).

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 $0.22.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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. 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.

A Side By Side comparison of John B. Sanfilippo & Son's Earnings Growth And 22% ROE

Firstly, we acknowledge that John B. Sanfilippo & Son has a significantly high ROE. Additionally, the company's ROE is higher compared to the industry average of 12% which is quite remarkable. Probably as a result of this, John B. Sanfilippo & Son was able to see a decent net income growth of 16% over the last five years.

We then compared John B. Sanfilippo & Son's 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 4.3% in the same period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It's important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if John B. Sanfilippo & Son is trading on a high P/E or a low P/E, relative to its industry.

Is John B. Sanfilippo & Son Using Its Retained Earnings Effectively?

In John B. Sanfilippo & Son's case, its respectable earnings growth can probably be explained by its low three-year median payout ratio of 14% (or a retention ratio of 86%), which suggests that the company is investing most of its profits to grow its business.

Besides, John B. Sanfilippo & Son has been paying dividends over a period of nine years. This shows that the company is committed to sharing profits with its shareholders.

Conclusion

Overall, we are quite pleased with John B. Sanfilippo & Son's performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Remember, the price of a stock is also dependent on the perceived risk. Therefore investors must keep themselves informed about the risks involved before investing in any company. To know the 2 risks we have identified for John B. Sanfilippo & Son visit our risks dashboard for free.

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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.