Is Weakness In Ten Entertainment Group plc (LON:TEG) Stock A Sign That The Market Could be Wrong Given Its Strong Financial Prospects?
Ten Entertainment Group (LON:TEG) has had a rough three months with its share price down 5.6%. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Particularly, we will be paying attention to Ten Entertainment 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. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.
See our latest analysis for Ten Entertainment Group
How Is ROE Calculated?
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 Ten Entertainment Group is:
45% = UK£27m ÷ UK£59m (Based on the trailing twelve months to January 2023).
The 'return' is the income the business earned over the last year. Another way to think of that is that for every £1 worth of equity, the company was able to earn £0.45 in profit.
Why Is ROE Important For Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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.
Ten Entertainment Group's Earnings Growth And 45% ROE
Firstly, we acknowledge that Ten Entertainment Group has a significantly high ROE. Second, a comparison with the average ROE reported by the industry of 8.5% also doesn't go unnoticed by us. This likely paved the way for the modest 12% net income growth seen by Ten Entertainment Group over the past five years. growth
Next, on comparing with the industry net income growth, we found that the growth figure reported by Ten Entertainment Group compares quite favourably to the industry average, which shows a decline of 9.5% in the same period.
Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is TEG fairly valued? This infographic on the company's intrinsic value has everything you need to know.
Is Ten Entertainment Group Efficiently Re-investing Its Profits?
Ten Entertainment Group has a low three-year median payout ratio of 6.6%, meaning that the company retains the remaining 93% of its profits. This suggests that the management is reinvesting most of the profits to grow the business.
Moreover, Ten Entertainment Group is determined to keep sharing its profits with shareholders which we infer from its long history of six years of paying a dividend. Our latest analyst data shows that the future payout ratio of the company is expected to rise to 44% over the next three years.
Conclusion
Overall, we are quite pleased with Ten Entertainment Group's performance. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. With that said, on studying the latest analyst forecasts, we found that while the company has seen growth in its past earnings, analysts expect its future earnings to shrink. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts 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.
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