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Games Workshop Group’s (LON:GAW) stock is up by 2.5% over the past week. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. In this article, we decided to focus on Games Workshop Group’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. Put another way, it reveals the company’s success at turning shareholder investments into profits.
Check out our latest analysis for Games Workshop Group
How Is ROE Calculated?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity
So, based on the above formula, the ROE for Games Workshop Group is:
51% = UK£119m ÷ UK£234m (Based on the trailing twelve months to November 2021).
The ‘return’ is the profit over the last twelve months. Another way to think of that is that for every £1 worth of equity, the company was able to earn £0.51 in profit.
What Is The Relationship Between ROE And Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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. 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.
A Side By Side comparison of Games Workshop Group’s Earnings Growth And 51% ROE
First thing first, we like that Games Workshop Group has an impressive ROE. Second, a comparison with the average ROE reported by the industry of 17% also doesn’t go unnoticed by us. As a result, Games Workshop Group’s exceptional 27% net income growth seen over the past five years, doesn’t come as a surprise.
We then performed a comparison between Games Workshop Group’s net income growth with the industry, which revealed that the company’s growth is similar to the average industry growth of 27% in the same period.
Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. What is GAW worth today? The intrinsic value infographic in our free research report helps visualize whether GAW is currently mispriced by the market.
Is Games Workshop Group Efficiently Re-investing Its Profits?
Games Workshop Group’s significant three-year median payout ratio of 56% (where it is retaining only 44% of its income) suggests that the company has been able to achieve a high growth in earnings despite returning most of its income to shareholders.
Additionally, Games Workshop Group has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Upon studying the latest analysts’ consensus data, we found that the company is expected to keep paying out approximately 60% of its profits over the next three years. Therefore, the company’s future ROE is also not expected to change by much with analysts predicting an ROE of 48%.
Summary
On the whole, we feel that Games Workshop Group’s performance has been quite good. Especially the high ROE, Which has contributed to the impressive growth seen in earnings. Despite the company reinvesting only a small portion of its profits, it still has managed to grow its earnings so that is appreciable. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. 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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.
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