In This Article:
Gaming Realms' (LON:GMR) stock up by 2.5% over the past month. Since the market usually pay for a company’s long-term financial health, we decided to study the company’s fundamentals to see if they could be influencing the market. Specifically, we decided to study Gaming Realms' ROE in this article.
ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.
View our latest analysis for Gaming Realms
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 Gaming Realms is:
24% = UK£5.9m ÷ UK£24m (Based on the trailing twelve months to December 2023).
The 'return' is the amount earned after tax 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 £0.24 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. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.
Gaming Realms' Earnings Growth And 24% ROE
First thing first, we like that Gaming Realms has an impressive ROE. Secondly, even when compared to the industry average of 7.7% the company's ROE is quite impressive. So, the substantial 77% net income growth seen by Gaming Realms over the past five years isn't overly surprising.
Next, on comparing with the industry net income growth, we found that Gaming Realms' growth is quite high when compared to the industry average growth of 34% 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. What is GMR worth today? The intrinsic value infographic in our free research report helps visualize whether GMR is currently mispriced by the market.