Shares of SkyCity Entertainment Group (NZSE:SKC) are up 13% over the past month. As most know, fundamentals are what generally guide market price movements over the long term, so we decided to take a look at key financial indicators in business today to see if they have a role to play. play in the recent price movement. In this article, we decided to focus on SkyCity Entertainment Group’s ROE.
Return on equity or ROE is a key metric used to gauge how effectively a company’s management is using the company’s capital. In simple terms, it is used to assess the profitability of a company in relation to its equity.
See our latest analysis for SkyCity Entertainment Group
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 SkyCity Entertainment Group is:
2.9% = NZ$45 million ÷ NZ$1.6 billion (based on trailing 12 months to December 2021).
The “return” is the annual profit. This means that for every NZ$1 of equity, the company generated a profit of NZ$0.03.
What does ROE have to do with earnings growth?
So far, we have learned that ROE measures how efficiently a company generates its profits. Depending on how much of those earnings the company reinvests or “keeps”, and how efficiently it does so, we are then able to gauge a company’s earnings growth potential. Generally speaking, all things being equal, companies with high return on equity and earnings retention have a higher growth rate than companies that do not share these attributes.
SkyCity Entertainment Group profit growth and ROE of 2.9%
As you can see, SkyCity Entertainment Group’s ROE seems quite weak. Even compared to the industry average of 9.6%, the ROE figure is quite disappointing. Accordingly, the disappointing ROE provides a backdrop to SkyCity Entertainment Group’s very weak net profit growth of 4.0% over the past five years.
We then compared the growth of SkyCity Entertainment Group’s net profit with the industry and we are glad to see that the growth figure of the company is higher compared to the industry which has a growth rate of 3, 3% over the same period.
Earnings growth is an important metric to consider when evaluating a stock. It is important for an investor to know whether the market has priced in the expected growth (or decline) in the company’s earnings. By doing so, they will get an idea if the stock is headed for clear blue waters or if swampy waters are waiting. Is SkyCity Entertainment Group correctly valued compared to other companies? These 3 assessment metrics might help you decide.
Does SkyCity Entertainment Group effectively reinvest its profits?
Despite a moderate three-year median payout ratio of 34% (implying the company retains the remaining 66% of its revenue), SkyCity Entertainment Group’s earnings growth has been quite weak. So there could be other factors at play here that could potentially impede growth. For example, the company had to deal with headwinds.
Additionally, SkyCity Entertainment Group has been paying dividends for at least a decade, suggesting that management must have perceived that shareholders prefer dividends to earnings growth. Looking at current analyst consensus data, we can see that the company’s future payout ratio is expected to reach 87% over the next three years. Regardless, SkyCity Entertainment Group’s future ROE is expected to reach 9.6% despite the expected payout rate increase. There could likely be other factors that could drive future ROE growth.
Overall, we think SkyCity Entertainment Group certainly has some positives to consider. Despite its low rate of return, the fact that the company reinvests a very large portion of its profits back into its business no doubt contributed to the strong growth in its profits. That said, looking at current analyst estimates, we found that the company’s earnings are expected to accelerate. To learn more about the latest analyst forecasts for the company, check out this analyst forecast visualization for the company.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.