Games Workshop Group PLC's (LON:GAW) Stock Has Fared Decently: Is the Market Following Strong Financials?

Games Workshop Group's (LON:GAW) stock is up by 5.5% over the past three months. Since the market usually pay for a company’s long-term financial health, we decided to study the company’s fundamentals to see if they could be influencing the market. Specifically, we decided to study Games Workshop Group's ROE in this article.

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.

View our latest analysis for Games Workshop Group

How Do You Calculate Return On Equity?

The formula for return on equity is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Games Workshop Group is:

54% = UK£98m ÷ UK£182m (Based on the trailing twelve months to November 2020).

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 £0.54.

What Has ROE Got To Do With Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.

Games Workshop Group's Earnings Growth And 54% ROE

Firstly, we acknowledge that Games Workshop Group has a significantly high ROE. Second, a comparison with the average ROE reported by the industry of 18% also doesn't go unnoticed by us. Under the circumstances, Games Workshop Group's considerable five year net income growth of 33% was to be expected.

We then performed a comparison between Games Workshop Group's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 30% in the same period.

past-earnings-growth

Earnings growth is an important metric to consider when valuing a stock. 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. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Games Workshop Group is trading on a high P/E or a low P/E, relative to its industry.

Is Games Workshop Group Using Its Retained Earnings Effectively?

The high three-year median payout ratio of 63% (implying that it keeps only 37% of profits) for Games Workshop Group suggests that the company's growth wasn't really hampered despite it returning most of the earnings to its shareholders.

Additionally, Games Workshop 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. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 59%. Therefore, the company's future ROE is also not expected to change by much with analysts predicting an ROE of 61%.

Summary

In total, we are pretty happy with Games Workshop 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, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. 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.

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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