Did Janus Henderson Group plc (JHG) Create Value For Investors Over The Past Year?
Janus Henderson Group plc (NYSE:JHG) generated a below-average return on equity of 6.09% in the past 12 months, while its industry returned 12.81%. An investor may attribute an inferior ROE to a relatively inefficient performance, and whilst this can often be the case, knowing the nuts and bolts of the ROE calculation may change that perspective and give you a deeper insight into JHG’s past performance. I will take you through how metrics such as financial leverage impact ROE which may affect the overall sustainability of JHG’s returns. View our latest analysis for Janus Henderson Group
Breaking down ROE — the mother of all ratios
Return on Equity (ROE) is a measure of JHG’s profit relative to its shareholders’ equity. An ROE of 6.09% implies $0.06 returned on every $1 invested. While a higher ROE is preferred in most cases, there are several other factors we should consider before drawing any conclusions.
Return on Equity = Net Profit ÷ Shareholders Equity
ROE is assessed against cost of equity, which is measured using the Capital Asset Pricing Model (CAPM) – but let’s not dive into the details of that today. For now, let’s just look at the cost of equity number for JHG, which is 8.94%. This means JHG’s returns actually do not cover its own cost of equity, with a discrepancy of -2.85%. This isn’t sustainable as it implies, very simply, that the company pays more for its capital than what it generates in return. ROE can be broken down into three different ratios: net profit margin, asset turnover, and financial leverage. This is called the Dupont Formula:
Dupont Formula
ROE = profit margin × asset turnover × financial leverage
ROE = (annual net profit ÷ sales) × (sales ÷ assets) × (assets ÷ shareholders’ equity)
ROE = annual net profit ÷ shareholders’ equity
Essentially, profit margin shows how much money the company makes after paying for all its expenses. Asset turnover shows how much revenue JHG can generate with its current asset base. And finally, financial leverage is simply how much of assets are funded by equity, which exhibits how sustainable JHG’s capital structure is. Since ROE can be artificially increased through excessive borrowing, we should check JHG’s historic debt-to-equity ratio. Currently the debt-to-equity ratio stands at a low 8.71%, which means JHG still has headroom to take on more leverage in order to increase profits.
What this means for you:
Are you a shareholder? JHG’s ROE is underwhelming relative to the industry average, and its returns were also not strong enough to cover its own cost of equity. Since its existing ROE is not fuelled by unsustainable debt, investors shouldn’t give up as JHG still has capacity to improve shareholder returns by borrowing to invest in new projects in the future. If you’re looking for new ideas for high-returning stocks, you should take a look at our free platform to see the list of stocks with Return on Equity over 20%.
Are you a potential investor? If you are considering investing in JHG, basing your decision on ROE alone is certainly not sufficient. I recommend you do additional fundamental analysis by looking through our most recent infographic report on Janus Henderson Group to help you make a more informed investment decision.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.
