With its stock down 15% in the past three months, it’s easy to overlook gaming operators (WSE:GOP). But if you pay close attention, you might find that its leading financial indicators look pretty decent, which could mean the stock could potentially rise in the long run as markets generally reward more resilient long-term fundamentals. Specifically, we decided to study the ROE of gambling operators in this article.
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 other words, it is a profitability ratio that measures the rate of return on capital contributed by the company’s shareholders.
Check out our latest analysis for gaming operators
How is ROE calculated?
Return on equity can be calculated using the formula:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the formula above, the ROE for gaming operators is:
15% = 2.7 million zł ÷ 18 million zł (based on the last twelve months until September 2021).
“Yield” is the income the business has earned over the past year. Thus, this means that for every PLN1 of its shareholder’s investments, the company generates a profit of 0.15 PLN.
Why is ROE important for earnings growth?
So far, we have learned that ROE measures how efficiently a company generates its profits. We now need to assess how much profit the company is reinvesting or “retaining” for future growth, which then gives us an idea of the company’s 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.
Gaming Operator Profit Growth and 15% ROE
For starters, gaming operators seem to have a respectable ROE. Even so, compared to the industry average ROE of 24%, we are not very enthusiastic. Games Operators was still able to see a decent growth in net income of 15% over the past five years. Therefore, the earnings growth could likely have been caused by other variables. For example, the business has a low payout ratio or is efficiently managed. Keep in mind that the company has a respectable level of ROE. It’s just that the industry’s ROE is higher. So this also provides some context for the earnings growth the company is seeing.
Then, comparing with the growth in net income of the industry, we found that the growth reported by gaming operators was lower than the industry growth of 41% over the same period, which we do not don’t like to see.
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. This then helps them determine if the stock is positioned for a bright or bleak future. What is GOP worth today? The intrinsic value infographic in our free research report helps visualize whether the GOP is currently being mispriced by the market.
Do gambling operators use their profits efficiently?
Games Operators has a large three-year median payout ratio of 87%, which means it only has 13% left to reinvest in its business. This implies that the company was able to achieve decent earnings growth despite returning most of its earnings to shareholders.
While Games Operators has increased its revenue, it only recently started paying dividends, which likely means the company has decided to impress new and existing shareholders with a dividend.
All in all, it seems that Games Operators has positive aspects for its business. Its profits grew respectably as we saw earlier, which was probably achieved by the company reinvesting its profits at a decent rate of return. Yet its earnings retention is quite low, so one wonders if the company’s growth could be higher, if it were to pay out fewer dividends and retain more of its earnings? So far, we have only had a brief discussion of corporate earnings growth. To better understand past earnings growth for gaming operators, check out this visualization of past earnings, revenue, and cash flow.
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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.