Yahoo Finance Can Lions Gate Entertainment Corp’s (NYSE:LGF.A) ROE Continue To Surpass The Industry Average?
This article is intended for those of you who are at the beginning of your investing journey and want to begin learning the link between Lions Gate Entertainment Corp (NYSE:LGF.A)’s return fundamentals and stock market performance.
Lions Gate Entertainment Corp (NYSE:LGF.A) delivered an ROE of 14.37% over the past 12 months, which is an impressive feat relative to its industry average of 14.15% during the same period. While the impressive ratio tells us that LGF.A has made significant profits from little equity capital, ROE doesn’t tell us if LGF.A has borrowed debt to make this happen. We’ll take a closer look today at factors like financial leverage to determine whether LGF.A’s ROE is actually sustainable. View out our latest analysis for Lions Gate Entertainment
What you must know about ROE
Return on Equity (ROE) is a measure of Lions Gate Entertainment’s profit relative to its shareholders’ equity. It essentially shows how much the company can generate in earnings given the amount of equity it has raised. Generally speaking, a higher ROE is preferred; however, there are other factors we must also consider before making any conclusions.
Return on Equity = Net Profit ÷ Shareholders Equity
ROE is measured against cost of equity in order to determine the efficiency of Lions Gate Entertainment’s equity capital deployed. Its cost of equity is 11.08%. Given a positive discrepancy of 3.28% between return and cost, this indicates that Lions Gate Entertainment pays less for its capital than what it generates in return, which is a sign of capital efficiency. ROE can be split up into three useful ratios: net profit margin, asset turnover, and financial leverage. This is called the Dupont Formula:
Dupont Formula
ROE = profit margin × asset turnover × financial leverage
ROE = (annual net profit ÷ sales) × (sales ÷ assets) × (assets ÷ shareholders’ equity)
ROE = annual net profit ÷ shareholders’ equity
Basically, profit margin measures how much of revenue trickles down into earnings which illustrates how efficient the business is with its cost management. Asset turnover reveals how much revenue can be generated from Lions Gate Entertainment’s asset base. The most interesting ratio, and reflective of sustainability of its ROE, is financial leverage. Since ROE can be artificially increased through excessive borrowing, we should check Lions Gate Entertainment’s historic debt-to-equity ratio. At 83.74%, Lions Gate Entertainment’s debt-to-equity ratio appears sensible and indicates the above-average ROE is generated from its capacity to increase profit without a large debt burden.
Next Steps:
ROE is one of many ratios which meaningfully dissects financial statements, which illustrates the quality of a company. Lions Gate Entertainment exhibits a strong ROE against its peers, as well as sufficient returns to cover its cost of equity. ROE is not likely to be inflated by excessive debt funding, giving shareholders more conviction in the sustainability of high returns. ROE is a helpful signal, but it is definitely not sufficient on its own to make an investment decision.
For Lions Gate Entertainment, there are three essential factors you should further examine:
Financial Health: Does it have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
Valuation: What is Lions Gate Entertainment worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether Lions Gate Entertainment is currently mispriced by the market.
Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of Lions Gate Entertainment? Explore our interactive list of stocks with large growth potential to get an idea of what else is out there you may be missing!
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.
