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Most readers would already know that Event Hospitality & Entertainment's (ASX:EVT) stock increased by 8.9% over the past three months. Given that the markets usually pay for the long-term financial health of a company, we wonder if the current momentum in the share price will keep up, given that the company's financials don't look very promising. Specifically, we decided to study Event Hospitality & Entertainment's ROE in this article.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
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 Event Hospitality & Entertainment is:
9.0% = AU$101m ÷ AU$1.1b (Based on the trailing twelve months to December 2019).
The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every A$1 worth of equity, the company was able to earn A$0.09 in profit.
What Has ROE Got To Do With Earnings Growth?
So far, we've learnt that ROE is a measure of a company's profitability. 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. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.
Event Hospitality & Entertainment's Earnings Growth And 9.0% ROE
At first glance, Event Hospitality & Entertainment's ROE doesn't look very promising. However, given that the company's ROE is similar to the average industry ROE of 9.8%, we may spare it some thought. Having said that, Event Hospitality & Entertainment's net income growth over the past five years is more or less flat. Remember, the company's ROE is not particularly great to begin with. Hence, this provides some context to the flat earnings growth seen by the company.
As a next step, we compared Event Hospitality & Entertainment's net income growth with the industry and discovered that the company's growth is slightly less than the industry average growth of 0.3% in the same period.
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. This then helps them determine if the stock is placed for a bright or bleak future. Is Event Hospitality & Entertainment fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is Event Hospitality & Entertainment Using Its Retained Earnings Effectively?
The high three-year median payout ratio of 78% (meaning, the company retains only 22% of profits) for Event Hospitality & Entertainment suggests that the company's earnings growth was miniscule as a result of paying out a majority of its earnings.
Additionally, Event Hospitality & Entertainment has paid dividends over a period of at least ten years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth. 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 76%. As a result, Event Hospitality & Entertainment's ROE is not expected to change by much either, which we inferred from the analyst estimate of 8.5% for future ROE.
Overall, we would be extremely cautious before making any decision on Event Hospitality & Entertainment. As a result of its low ROE and lack of mich reinvestment into the business, the company has seen a disappointing earnings growth rate. With that said, we studied the latest analyst forecasts and found that while the company has shrunk its earnings in the past, analysts expect its earnings to grow in the future. 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. 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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