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With its stock down 6.4% over the past month, it is easy to disregard Hollywood Bowl Group (LON:BOWL). However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. In this article, we decided to focus on Hollywood Bowl Group's ROE.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.
See our latest analysis for Hollywood Bowl Group
How Is ROE Calculated?
ROE 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 Hollywood Bowl Group is:
23% = UK£35m ÷ UK£151m (Based on the trailing twelve months to March 2024).
The 'return' is the amount earned after tax over the last twelve months. That means that for every £1 worth of shareholders' equity, the company generated £0.23 in profit.
What Has ROE Got To Do With Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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.
Hollywood Bowl Group's Earnings Growth And 23% ROE
To begin with, Hollywood Bowl Group has a pretty high ROE which is interesting. Additionally, the company's ROE is higher compared to the industry average of 8.8% which is quite remarkable. So, the substantial 23% net income growth seen by Hollywood Bowl Group over the past five years isn't overly surprising.
We then compared Hollywood Bowl Group's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 11% in the same 5-year 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. Is Hollywood Bowl Group fairly valued compared to other companies? These 3 valuation measures might help you decide.