The recent performance of Games Workshop Group PLC (LON:GAW) shares looks decent – Can strong fundamentals be the reason?
Games Workshop Group (LON:GAW) stock is up 2.5% over the past week. Given that the market rewards strong long-term financials, we wonder if this is the case in this case. In this article, we decided to focus on Games Workshop 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 other words, it reveals the company’s success in turning shareholders’ investments into profits.
Check out our latest analysis for Games Workshop Group
How is ROE calculated?
The ROE formula is:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE for Games Workshop Group is:
51% = £119m ÷ £234m (based on trailing 12 months to November 2021).
The “yield” is the profit of the last twelve months. Another way to think about this is that for every £1 of equity, the company was able to make a profit of £0.51.
What is the relationship between ROE and 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. Assuming everything else remains unchanged, the higher the ROE and earnings retention, the higher a company’s growth rate compared to companies that don’t necessarily exhibit these characteristics.
A side-by-side comparison of Games Workshop Group earnings growth and 51% ROE
First of all, we love that Games Workshop Group has an impressive ROE. Second, a comparison to the average industry-reported ROE of 17% also does not go unnoticed by us. As a result, Games Workshop Group’s outstanding 27% net profit growth over the past five years comes as no surprise.
We then performed a comparison between Games Workshop Group’s net income growth and that of the industry, which revealed that the company’s growth is similar to the average industry growth of 27% over the past year. the same period.
Earnings growth is an important metric to consider when evaluating a stock. What investors then need to determine is whether the expected earnings growth, or lack thereof, is already priced into the stock price. This then helps them determine if the stock is positioned 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 being mispriced by the market.
Does Games Workshop Group effectively reinvest its profits?
Games Workshop Group’s large three-year median payout ratio of 56% (where it retains just 44% of its revenue) suggests that the company has been able to achieve strong earnings growth despite the return of the most of its income to shareholders.
Moreover, Games Workshop Group has paid dividends over a period of at least ten years, which means that the company is quite serious about sharing its profits with its shareholders. After reviewing the latest analyst consensus data, we found that the company is expected to continue to pay out around 60% of its earnings over the next three years. As a result, the company’s future ROE is also not expected to change much, with analysts predicting an ROE of 48%.
Overall, we believe Games Workshop Group’s performance has been quite good. Especially the high ROE, which contributed to the impressive earnings growth. Although the company reinvests only a small portion of its profits, it has still managed to grow its profits, which is appreciable. That said, a study of the latest analyst forecasts shows that the company should see a slowdown in future earnings growth. Are these analyst expectations based on general industry expectations or company fundamentals? Click here to access our analyst forecast page 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.