Nine Entertainment Holdings’ (ASX:NEC) stock up by 4.6% over the past week. Given that stock prices are usually aligned with a company’s financial performance in the long-term, we decided to investigate if the company’s decent financials had a hand to play in the recent price move. Specifically, we decided to study Nine Entertainment Holdings’ ROE in this article.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
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How To 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 Nine Entertainment Holdings is:
15% = AU$315m ÷ AU$2.1b (Based on the trailing twelve months to June 2022).
The ‘return’ is the amount earned after tax over the last twelve months. That means that for every A$1 worth of shareholders’ equity, the company generated A$0.15 in profit.
What Has ROE Got To Do With 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.
Nine Entertainment Holdings’ Earnings Growth And 15% ROE
At first glance, Nine Entertainment Holdings seems to have a decent ROE. On comparing with the average industry ROE of 9.5% the company’s ROE looks pretty remarkable. Despite this, Nine Entertainment Holdings’ five year net income growth was quite flat over the past five years. We reckon that there could be some other factors at play here that’s limiting the company’s growth. Such as, the company pays out a huge portion of its earnings as dividends, or is faced with competitive pressures.
We then performed a comparison between Nine Entertainment Holdings’ net income growth with the industry, which revealed that the company’s growth is similar to the average industry growth of 0.5% in the same period.
Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company’s expected earnings growth (or decline). 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 Nine Entertainment Holdings”s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Nine Entertainment Holdings Making Efficient Use Of Its Profits?
With a high three-year median payout ratio of 91% (implying that the company keeps only 9.4% of its income) of its business to reinvest into its business), most of Nine Entertainment Holdings’ profits are being paid to shareholders, which explains the absence of growth in earnings.
In addition, Nine Entertainment Holdings has been paying dividends over a period of eight years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth. Existing analyst estimates suggest that the company’s future payout ratio is expected to drop to 70% over the next three years. However, the company’s ROE is not expected to change by much despite the lower expected payout ratio.
On the whole, we do feel that Nine Entertainment Holdings has some positive attributes. The company has grown its earnings moderately as a result of its impressive ROE. Yet, the business is retaining hardly any of its profits. This might have negative implications on the company’s future growth. With that said, the latest industry analyst forecasts reveal that the company’s earnings are expected to accelerate. 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.