Jet2's (LON:JET2) stock is up by a considerable 6.5% over the past month. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. Particularly, we will be paying attention to Jet2's ROE today.

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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

View our latest analysis for Jet2

How Is ROE Calculated?

ROE 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 Jet2 is:

28% = UK￡399m ÷ UK￡1.4b (Based on the trailing twelve months to March 2024).

The 'return' refers to a company's earnings over the last year. So, this means that for every ￡1 of its shareholder's investments, the company generates a profit of ￡0.28.

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. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.

Jet2's Earnings Growth And 28% ROE

First thing first, we like that Jet2 has an impressive ROE. Additionally, a comparison with the average industry ROE of 30% also portrays the company's ROE in a good light. Given the circumstances, the significant 32% net income growth seen by Jet2 over the last five years is not surprising.

Next, on comparing with the industry net income growth, we found that Jet2's growth is quite high when compared to the industry average growth of 22% in the same period, which is great to see.

Earnings growth is an important metric to consider when valuing a stock. 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. 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 Jet2 is trading on a high P/E or a low P/E, relative to its industry.