It is hard to get excited after looking at Evergreen Gaming’s (CVE:TNA) recent performance, when its stock has declined 21% over the past three months. However, the company’s fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. In this article, we decided to focus on Evergreen Gaming’s ROE.
Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. Put another way, it reveals the company’s success at turning shareholder investments into profits.
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 Evergreen Gaming is:
21% = US$6.9m ÷ US$33m (Based on the trailing twelve months to September 2021).
The ‘return’ is the yearly profit. So, this means that for every CA$1 of its shareholder’s investments, the company generates a profit of CA$0.21.
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. We now need to evaluate how much profit the company reinvests or “retains” for future growth which then gives us an idea about the growth potential of the company. 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.
A Side By Side comparison of Evergreen Gaming’s Earnings Growth And 21% ROE
To start with, Evergreen Gaming’s ROE looks acceptable. On comparing with the average industry ROE of 12% the company’s ROE looks pretty remarkable. As you might expect, the 8.2% net income decline reported by Evergreen Gaming is a bit of a surprise. Therefore, there might be some other aspects that could explain this. Such as, the company pays out a huge portion of its earnings as dividends, or is faced with competitive pressures.
As a next step, we compared Evergreen Gaming’s performance with the industry and found thatEvergreen Gaming’s performance is depressing even when compared with the industry, which has shrunk its earnings at a rate of 5.5% in the same period, which is a slower than the company.
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. Doing so will help them establish if the stock’s future looks promising or ominous. Is Evergreen Gaming fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is Evergreen Gaming Making Efficient Use Of Its Profits?
Evergreen Gaming doesn’t pay any dividend, meaning that potentially all of its profits are being reinvested in the business, which doesn’t explain why the company’s earnings have shrunk if it is retaining all of its profits. It looks like there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.
In total, it does look like Evergreen Gaming has some positive aspects to its business. However, given the high ROE and high profit retention, we would expect the company to be delivering strong earnings growth, but that isn’t the case here. This suggests that there might be some external threat to the business, that’s hampering its growth. While we won’t completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. You can see the 4 risks we have identified for Evergreen Gaming by visiting our risks dashboard for free on our platform here.
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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.