Games Workshop Group PLC's (LON:GAW) Stock Has Been Sliding But Fundamentals Look Strong: Is The Market Wrong?

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With its stock down 18% over the past month, it is easy to disregard Games Workshop Group (LON:GAW). However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Particularly, we will be paying attention to Games Workshop Group’s ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder’s equity.

Check out 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:

62% = UK£122m ÷ UK£196m (Based on the trailing twelve months to May 2021).

The ‘return’ is the profit over the last twelve months. One way to conceptualize this is that for each £1 of shareholders’ capital it has, the company made £0.62 in profit.

Why Is ROE Important For Earnings Growth?

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

Games Workshop Group’s Earnings Growth And 62% 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 21% also doesn’t go unnoticed by us. As a result, Games Workshop Group’s exceptional 31% net income growth seen over the past five years, doesn’t come as a surprise.

As a next step, we compared Games Workshop Group’s net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 31% 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. What is GAW worth today? The intrinsic value infographic in our free research report helps visualize whether GAW is currently mispriced by the market.

Is Games Workshop Group Using Its Retained Earnings Effectively?

The high three-year median payout ratio of 59% (implying that it keeps only 41% 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 63%. As a result, Games Workshop Group’s ROE is not expected to change by much either, which we inferred from the analyst estimate of 60% for future ROE.

Conclusion

Overall, we are quite pleased with Games Workshop Group’s performance. We are particularly impressed by the considerable earnings growth posted by the company, which was likely backed by its high ROE. While the company is paying out most of its earnings as dividends, it has been able to grow its earnings in spite of it, so that’s probably a good sign. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. 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. 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.

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