Most readers would already be aware that SKYCITY Entertainment Group's (NZSE:SKC) stock increased significantly by 78% over the past three months. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. Particularly, we will be paying attention to SKYCITY Entertainment Group's ROE today.
Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
How To Calculate Return On Equity?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for SKYCITY Entertainment Group is:
30% = NZ$420m ÷ NZ$1.4b (Based on the trailing twelve months to December 2019).
The 'return' is the yearly profit. That means that for every NZ$1 worth of shareholders' equity, the company generated NZ$0.30 in profit.
What Is The Relationship Between ROE And Earnings Growth?
So far, we've learnt 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.
A Side By Side comparison of SKYCITY Entertainment Group's Earnings Growth And 30% ROE
Firstly, we acknowledge that SKYCITY Entertainment Group has a significantly high ROE. Secondly, even when compared to the industry average of 10% the company's ROE is quite impressive. This likely paved the way for the modest 18% net income growth seen by SKYCITY Entertainment Group over the past five years. growth
We then compared SKYCITY Entertainment 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 period.
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 SKC? You can find out in our latest intrinsic value infographic research report.
Is SKYCITY Entertainment Group Using Its Retained Earnings Effectively?
SKYCITY Entertainment Group has a significant three-year median payout ratio of 89%, meaning that it is left with only 11% to reinvest into its business. This implies that the company has been able to achieve decent earnings growth despite returning most of its profits to shareholders.
Additionally, SKYCITY Entertainment Group has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 97% of its profits over the next three years. Regardless, SKYCITY Entertainment Group's ROE is speculated to decline to 12% despite there being no anticipated change in its payout ratio.
Overall, we are quite pleased with SKYCITY Entertainment Group's performance. Especially the high ROE, Which has contributed to the impressive growth seen in earnings. Despite the company reinvesting only a small portion of its profits, it still has managed to grow its earnings so that is appreciable. With that said, on studying the latest analyst forecasts, we found that while the company has seen growth in its past earnings, analysts expect its future earnings to shrink. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.
This article by Simply Wall St is general in nature. 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.
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