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Monarch Casino & Resort, Inc. (NASDAQ:MCRI) Stock Is Going Strong But Fundamentals Look Uncertain: What Lies Ahead ?

Simply Wall St
·3 min read

Most readers would already be aware that Monarch Casino & Resort's (NASDAQ:MCRI) stock increased significantly by 31% over the past three months. However, we wonder if the company's inconsistent financials would have any adverse impact on the current share price momentum. In this article, we decided to focus on Monarch Casino & Resort's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

View our latest analysis for Monarch Casino & Resort

How Do You Calculate Return On Equity?

ROE 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 Monarch Casino & Resort is:

4.1% = US$15m ÷ US$354m (Based on the trailing twelve months to September 2020).

The 'return' is the income the business earned over the last year. That means that for every $1 worth of shareholders' equity, the company generated $0.04 in profit.

Why Is ROE Important For Earnings Growth?

So far, we've learned 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 everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

Monarch Casino & Resort's Earnings Growth And 4.1% ROE

At first glance, Monarch Casino & Resort's ROE doesn't look very promising. A quick further study shows that the company's ROE doesn't compare favorably to the industry average of 8.3% either. Thus, the low net income growth of 3.6% seen by Monarch Casino & Resort over the past five years could probably be the result of the low ROE.

As a next step, we compared Monarch Casino & Resort's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 4.8% in the same period.

past-earnings-growth
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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. What is MCRI worth today? The intrinsic value infographic in our free research report helps visualize whether MCRI is currently mispriced by the market.

Is Monarch Casino & Resort Making Efficient Use Of Its Profits?

Summary

In total, we're a bit ambivalent about Monarch Casino & Resort's performance. Even though it appears to be retaining most of its profits, given the low ROE, investors may not be benefitting from all that reinvestment after all. The low earnings growth suggests our theory correct. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. 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.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.