Is Hollywood Bowl Group plc's (LON:BOWL) Latest Stock Performance A Reflection Of Its Financial Health?
Most readers would already be aware that Hollywood Bowl Group's (LON:BOWL) stock increased significantly by 23% over the past three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Particularly, we will be paying attention to Hollywood Bowl Group's ROE today.
ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
See our latest analysis for Hollywood Bowl Group
How To Calculate Return On Equity?
Return on equity can be calculated by using the formula:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Hollywood Bowl Group is:
23% = UK£34m ÷ UK£148m (Based on the trailing twelve months to September 2023).
The 'return' is the yearly profit. Another way to think of that is that for every £1 worth of equity, the company was able to earn £0.23 in profit.
What Has ROE Got To Do With 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.
Hollywood Bowl Group's Earnings Growth And 23% ROE
To begin with, Hollywood Bowl Group has a pretty high ROE which is interesting. Additionally, the company's ROE is higher compared to the industry average of 8.3% which is quite remarkable. Probably as a result of this, Hollywood Bowl Group was able to see a decent net income growth of 17% over the last five years.
We then compared Hollywood Bowl Group's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 7.5% in the same 5-year period.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. Is BOWL fairly valued? This infographic on the company's intrinsic value has everything you need to know.
Is Hollywood Bowl Group Efficiently Re-investing Its Profits?
The high three-year median payout ratio of 55% (or a retention ratio of 45%) for Hollywood Bowl Group suggests that the company's growth wasn't really hampered despite it returning most of its income to its shareholders.
Besides, Hollywood Bowl Group has been paying dividends over a period of seven years. This shows that the company is committed to sharing profits with its shareholders. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 55% of its profits over the next three years. Therefore, the company's future ROE is also not expected to change by much with analysts predicting an ROE of 21%.
Conclusion
In total, we are pretty happy with Hollywood Bowl 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. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.
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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.
