Most readers would already be aware that Aristocrat Leisure's (ASX:ALL) stock increased significantly by 5.2% over the past week. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. In this article, we decided to focus on Aristocrat Leisure's ROE.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

See our latest analysis for Aristocrat Leisure

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 Aristocrat Leisure is:

18% = AU$1.1b ÷ AU$6.2b (Based on the trailing twelve months to March 2023).

The 'return' is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each A$1 of shareholders' capital it has, the company made A$0.18 in profit.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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 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.

Aristocrat Leisure's Earnings Growth And 18% ROE

At first glance, Aristocrat Leisure seems to have a decent ROE. Further, the company's ROE compares quite favorably to the industry average of 9.3%. Probably as a result of this, Aristocrat Leisure was able to see a decent growth of 9.0% over the last five years.

When you consider the fact that the industry earnings have shrunk at a rate of 1.9% in the same 5-year period, the company's net income growth is pretty remarkable.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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 ALL? You can find out in our latest intrinsic value infographic research report.