What is Behind Century Casinos Inc’s (NASDAQ:CNTY) Superior ROE?
With an ROE of 11.67%, Century Casinos Inc (NASDAQ:CNTY) outpaced its own industry which delivered a less exciting 11.07% over the past year. While the impressive ratio tells us that CNTY has made significant profits from little equity capital, ROE doesn’t tell us if CNTY has borrowed debt to make this happen. Today, we’ll take a closer look at some factors like financial leverage to see how sustainable CNTY’s ROE is. View our latest analysis for Century Casinos
Breaking down Return on Equity
Return on Equity (ROE) weighs Century Casinos’s profit against the level of its shareholders’ equity. An ROE of 11.67% implies $0.12 returned on every $1 invested. While a higher ROE is preferred in most cases, there are several other factors we should consider before drawing any conclusions.
Return on Equity = Net Profit ÷ Shareholders Equity
ROE is measured against cost of equity in order to determine the efficiency of Century Casinos’s equity capital deployed. Its cost of equity is 9.71%. Given a positive discrepancy of 1.96% between return and cost, this indicates that Century Casinos pays less for its capital than what it generates in return, which is a sign of capital efficiency. ROE can be dissected into three distinct 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
The first component is profit margin, which measures how much of sales is retained after the company pays for all its expenses. The other component, asset turnover, illustrates how much revenue Century Casinos can make from its asset base. Finally, financial leverage will be our main focus today. It shows how much of assets are funded by equity and can show how sustainable the company’s capital structure is. Since ROE can be inflated by excessive debt, we need to examine Century Casinos’s debt-to-equity level. The debt-to-equity ratio currently stands at a low 36.95%, meaning the above-average ROE is due to its capacity to produce profit growth without a huge debt burden.
Next Steps:
While ROE is a relatively simple calculation, it can be broken down into different ratios, each telling a different story about the strengths and weaknesses of a company. Century Casinos’s above-industry ROE is encouraging, and is also in excess of 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. Although ROE can be a useful metric, it is only a small part of diligent research.
For Century Casinos, I’ve compiled three pertinent factors you should look at:
1. 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.
2. Valuation: What is Century Casinos 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 Century Casinos is currently mispriced by the market.
3. Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of Century Casinos? 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.
