Most of our readers will already be aware that the Ainsworth Game Technology (ASX:AGI) share price has risen by 2.8% over the past week. As most readers will know, long term fundamentals are strongly correlated with market price movements, so today we decided to look at the company's key financial indicators to determine if they have any influence on the recent price movements. Specifically, in this article we decided to look at Ainsworth Game Technology's ROE.
Return on equity (ROE) is an important factor to consider for a shareholder because it tells them how effectively their capital is being reinvested. Simply put, it measures a company's profitability relative to shareholder's capital.
View our latest analysis for Ainsworth Game Technology
How to Calculate Return on Equity?
ROE can be calculated using the following formula:
Return on Equity = Net Income (from continuing operations) / Shareholders' Equity
So, based on the above formula, the ROE for Ainsworth Game Technology is:
1.6% = AU$5.5m ÷ AU$334m (Based on the trailing twelve months to June 2024).
“Return” refers to the company's profits over the past year, meaning that for every A$1 of shareholder investment, the company generated A$0.02 in profit.
What is the relationship between ROE and earnings growth?
Thus far, we've learned that ROE is a measure of a company's profitability. Depending on how much a company reinvests or “retains” these profits, and how effectively it does it, we are able to assess a company's earnings growth potential. Assuming all else remains constant, the higher the ROE and retained profits, the higher a company's growth rate will be relative to companies that don't necessarily have these characteristics.
Ainsworth Game Technology's Revenue Growth and 1.6% ROE
As you can see, Ainsworth Game Technology's ROE seems pretty low. Not only that, but compared to the industry average of 11%, the company's ROE is quite unremarkable. Despite this, Ainsworth Game Technology has managed to grow its net income at a respectable 28% growth rate over the past five years. We think there may be other factors at play here, such as the company's low dividend payout ratio or being efficiently managed.
Secondly, when comparing with the industry's net income growth rate, we find that Ainsworth Game Technology's growth rate is very high and impressive compared to the average industry growth rate of 17% during the same period.
Past Revenue Growth
Earnings growth is a big driver of stock valuation. What investors need to determine next is whether the expected earnings growth, or lack thereof, is already priced into the stock price. Doing so will tell them whether the stock is heading into clear blue waters or swampy waters await. Is Ainsworth Game Technology fairly valued relative to other companies? The following three valuation metrics may help you decide:
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Is Ainsworth Game Technology reinvesting its profits efficiently?
Ainsworth Game Technology doesn't pay regular dividends to shareholders, which means it reinvests all of its profits back into the business, which is likely what's driving the strong earnings growth rates mentioned above.
Conclusion
Overall, we feel that Ainsworth Game Technology certainly has some positive factors to consider. Despite its low profitability, the company has recorded impressive revenue growth as a result of heavily reinvesting in the business. We looked at current analyst forecasts and found that analysts expect the company to continue its recent growth trends. To know more about the latest analyst forecasts for the company, check out our visualization of analyst forecasts for the company.
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This article by Simply Wall St is of general nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology, and our articles are not intended as financial advice. It is not a recommendation to buy or sell a stock, and does not take into account your objectives or financial situation. We aim to provide long-term analysis driven by fundamental data. Please note that our analysis may not take into account the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any of the stocks mentioned herein.
