Is SkyCity Entertainment Group Limited's (NZSE:SKC) Recent Price Movement Underpinned By Its Weak Fundamentals?

editorial-team@simplywallst.com (Simply Wall St)

Mon, Jan 15, 2024, 7:38 PM 4 min read

With its stock down 5.2% over the past three months, it is easy to disregard SkyCity Entertainment Group (NZSE:SKC). It is possible that the markets have ignored the company's differing financials and decided to lean-in to the negative sentiment. Long-term fundamentals are usually what drive market outcomes, so it's worth paying close attention. In this article, we decided to focus on SkyCity Entertainment Group's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Put another way, it reveals the company's success at turning shareholder investments into profits.

View our latest analysis for SkyCity Entertainment Group

How To Calculate Return On Equity?

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 SkyCity Entertainment Group is:

0.5% = NZ$8.0m ÷ NZ$1.5b (Based on the trailing twelve months to June 2023).

The 'return' is the income the business earned over the last year. So, this means that for every NZ$1 of its shareholder's investments, the company generates a profit of NZ$0.01.

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

SkyCity Entertainment Group's Earnings Growth And 0.5% ROE

It is quite clear that SkyCity Entertainment Group's ROE is rather low. Even compared to the average industry ROE of 6.7%, the company's ROE is quite dismal. Therefore, it might not be wrong to say that the five year net income decline of 41% seen by SkyCity Entertainment Group was possibly a result of it having a lower ROE. We reckon that there could also be other factors at play here. For example, the business has allocated capital poorly, or that the company has a very high payout ratio.

As a next step, we compared SkyCity Entertainment Group's performance with the industry and found thatSkyCity Entertainment Group's performance is depressing even when compared with the industry, which has shrunk its earnings at a rate of 5.4% in the same period, which is a slower than the company.

past-earnings-growth — NZSE:SKC Past Earnings Growth January 16th 2024

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. Has the market priced in the future outlook for SKC? You can find out in our latest intrinsic value infographic research report.

Is SkyCity Entertainment Group Making Efficient Use Of Its Profits?

Despite having a normal three-year median payout ratio of 44% (where it is retaining 56% of its profits), SkyCity Entertainment Group has seen a decline in earnings as we saw above. It looks like there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.

In addition, SkyCity Entertainment Group has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth. Looking at the current analyst consensus data, we can see that the company's future payout ratio is expected to rise to 82% over the next three years. However, SkyCity Entertainment Group's future ROE is expected to rise to 9.5% despite the expected increase in the company's payout ratio. We infer that there could be other factors that could be driving the anticipated growth in the company's ROE.

Conclusion

On the whole, we feel that the performance shown by SkyCity Entertainment Group can be open to many interpretations. Even though it appears to be retaining most of its profits, given the low ROE, investors may not be benefitting from all that reinvestment after all. The low earnings growth suggests our theory correct. Having said that, looking at current analyst estimates, we found that the company's earnings growth rate is expected to see a huge improvement. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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.