U.S. Markets open in 6 hrs 35 mins
  • S&P Futures

    4,226.25
    +4.00 (+0.09%)
     
  • Dow Futures

    33,820.00
    +15.00 (+0.04%)
     
  • Nasdaq Futures

    14,200.75
    +35.25 (+0.25%)
     
  • Russell 2000 Futures

    2,285.20
    +0.70 (+0.03%)
     
  • Crude Oil

    70.76
    -0.28 (-0.39%)
     
  • Gold

    1,784.50
    +9.70 (+0.55%)
     
  • Silver

    26.19
    +0.33 (+1.29%)
     
  • EUR/USD

    1.1892
    -0.0018 (-0.1546%)
     
  • 10-Yr Bond

    1.5110
    0.0000 (0.00%)
     
  • Vix

    17.75
    -0.40 (-2.20%)
     
  • GBP/USD

    1.3867
    -0.0057 (-0.4091%)
     
  • USD/JPY

    110.0820
    -0.1490 (-0.1352%)
     
  • BTC-USD

    37,477.28
    -1,757.34 (-4.48%)
     
  • CMC Crypto 200

    932.05
    -37.82 (-3.90%)
     
  • FTSE 100

    7,153.43
    -31.52 (-0.44%)
     
  • Nikkei 225

    28,964.08
    -54.25 (-0.19%)
     

Johnson Controls International plc's (NYSE:JCI) On An Uptrend But Financial Prospects Look Pretty Weak: Is The Stock Overpriced?

  • Oops!
    Something went wrong.
    Please try again later.
·4 min read
  • Oops!
    Something went wrong.
    Please try again later.

Johnson Controls International's (NYSE:JCI) stock is up by a considerable 22% over the past three months. We, however wanted to have a closer look at its key financial indicators as the markets usually pay for long-term fundamentals, and in this case, they don't look very promising. In this article, we decided to focus on Johnson Controls International's ROE.

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 Controls International

How Do You Calculate Return On Equity?

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 Controls International is:

6.1% = US$1.1b ÷ US$19b (Based on the trailing twelve months to March 2021).

The 'return' is the amount earned after tax over the last twelve months. That means that for every $1 worth of shareholders' equity, the company generated $0.06 in profit.

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. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

Johnson Controls International's Earnings Growth And 6.1% ROE

On the face of it, Johnson Controls International's ROE is not much to talk about. Next, when compared to the average industry ROE of 17%, the company's ROE leaves us feeling even less enthusiastic. As a result, Johnson Controls International reported a very low income growth of 2.7% over the past five years.

As a next step, we compared Johnson Controls International's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 4.2% in the same period.

past-earnings-growth
past-earnings-growth

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Johnson Controls International fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Johnson Controls International Making Efficient Use Of Its Profits?

Johnson Controls International has a three-year median payout ratio of 82% (implying that it keeps only 18% of its profits), meaning that it pays out most of its profits to shareholders as dividends, and as a result, the company has seen low earnings growth.

Additionally, Johnson Controls International has paid dividends over a period of at least ten years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth. Our latest analyst data shows that the future payout ratio of the company is expected to drop to 30% over the next three years. As a result, the expected drop in Johnson Controls International's payout ratio explains the anticipated rise in the company's future ROE to 14%, over the same period.

Summary

On the whole, Johnson Controls International's performance is quite a big let-down. The company has seen a lack of earnings growth as a result of retaining very little profits and whatever little it does retain, is being reinvested at a very low rate of return. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.