In This Article:
It is easy to overlook Gaming Realms' (LON:GMR) given its unimpressive and roughly flat price performance over the past month. But since value is created over the longer term, it's worth studying the company's strong financials to see what the future could hold. Particularly, we will be paying attention to Gaming Realms' ROE today.
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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.
See our latest analysis for Gaming Realms
How Is ROE Calculated?
Return on equity can be calculated by using the formula:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Gaming Realms is:
24% = UK£6.7m ÷ UK£28m (Based on the trailing twelve months to June 2024).
The 'return' is the income the business earned over the last year. So, this means that for every £1 of its shareholder's investments, the company generates a profit of £0.24.
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. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.
A Side By Side comparison of Gaming Realms' Earnings Growth And 24% ROE
To begin with, Gaming Realms has a pretty high ROE which is interesting. Second, a comparison with the average ROE reported by the industry of 11% also doesn't go unnoticed by us. Under the circumstances, Gaming Realms' considerable five year net income growth of 76% was to be expected.
As a next step, we compared Gaming Realms' net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 30%.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. Has the market priced in the future outlook for GMR? You can find out in our latest intrinsic value infographic research report.