Has Sports Entertainment Group Limited (ASX:SEG) Stock's Recent Performance Got Anything to Do With Its Financial Health?

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Most readers would already know that Sports Entertainment Group’s (ASX:SEG) stock increased by 2.1% over the past three months. We wonder if and what role the company’s financials play in that price change as a company’s long-term fundamentals usually dictate market outcomes. In this article, we decided to focus on Sports Entertainment Group’s ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company’s shareholders.

View our latest analysis for Sports Entertainment Group

How Is ROE Calculated?

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 Sports Entertainment Group is:

4.3% = AU$2.2m ÷ AU$51m (Based on the trailing twelve months to December 2021).

The ‘return’ is the income the business earned over the last year. One way to conceptualize this is that for each A$1 of shareholders’ capital it has, the company made A$0.04 in profit.

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company’s future earnings. 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. 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.

Sports Entertainment Group’s Earnings Growth And 4.3% ROE

When you first look at it, Sports Entertainment Group’s ROE doesn’t look that attractive. A quick further study shows that the company’s ROE doesn’t compare favorably to the industry average of 6.7% either. In spite of this, Sports Entertainment Group was able to grow its net income considerably, at a rate of 40% in the last five years. Therefore, there could be other reasons behind this growth. For instance, the company has a low payout ratio or is being managed efficiently.

Next, on comparing with the industry net income growth, we found that Sports Entertainment Group’s growth is quite high when compared to the industry average growth of 0.5% in the same period, which is great to see.

past-earnings-growth

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. If you’re wondering about Sports Entertainment Group’s’s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Sports Entertainment Group Using Its Retained Earnings Effectively?

Sports Entertainment Group doesn’t pay any dividend to its shareholders, meaning that the company has been reinvesting all of its profits into the business. This is likely what’s driving the high earnings growth number discussed above.

Summary

Overall, we feel that Sports Entertainment Group certainly does have some positive factors to consider. Despite its low rate of return, the fact that the company reinvests a very high portion of its profits into its business, no doubt contributed to its high earnings growth. While we won’t completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. Our risks dashboard would have the 3 risks we have identified for Sports Entertainment Group.

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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.