Could The Market Be Wrong About Ten Entertainment Group plc (LON:TEG) Given Its Attractive Financial Prospects?
It is hard to get excited after looking at Ten Entertainment Group’s (LON:TEG) recent performance, when its stock has declined 18% over the past three months. 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. In this article, we decided to focus on Ten Entertainment Group’s ROE.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder’s equity.
How Is ROE Calculated?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity
So, based on the above formula, the ROE for Ten Entertainment Group is:
16% = UK£9.0m ÷ UK£57m (Based on the trailing twelve months to December 2019).
The ‘return’ is the yearly profit. One way to conceptualize this is that for each £1 of shareholders’ capital it has, the company made £0.16 in profit.
What Is The Relationship Between ROE And Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company’s future earnings. Depending on how much of these profits the company reinvests or “retains”, and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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 16% ROE
To start with, Ten Entertainment Group’s ROE looks acceptable. On comparing with the average industry ROE of 8.9% the company’s ROE looks pretty remarkable. This certainly adds some context to Ten Entertainment Group’s exceptional 49% net income growth seen over the past five years. We reckon that there could also be other factors at play here. For instance, the company has a low payout ratio or is being managed efficiently.
We then compared Ten Entertainment 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 9.9% in the same period.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. If you’re wondering about Ten Entertainment Group’s’s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Ten Entertainment Group Using Its Retained Earnings Effectively?
The high three-year median payout ratio of 84% (implying that it keeps only 16% of profits) for Ten Entertainment Group suggests that the company’s growth wasn’t really hampered despite it returning most of the earnings to its shareholders.
Our latest analyst data shows that the future payout ratio of the company is expected to drop to 55% over the next three years.
In total, we are pretty happy with Ten Entertainment 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. Having said that, the company’s earnings growth is expected to slow down, as forecasted in the current analyst estimates. 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.