Nordic Entertainment Group (STO:NENT B) has had a great run on the share market with its stock up by a significant 28% over the last three months. As most would know, fundamentals are what usually guide market price movements over the long-term, so we decided to look at the company’s key financial indicators today to determine if they have any role to play in the recent price movement. In this article, we decided to focus on Nordic 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.
See our latest analysis for Nordic Entertainment Group
How Do You 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 Nordic Entertainment Group is:
5.4% = kr439m ÷ kr8.1b (Based on the trailing twelve months to June 2021).
The ‘return’ refers to a company’s earnings over the last year. One way to conceptualize this is that for each SEK1 of shareholders’ capital it has, the company made SEK0.05 in profit.
Why Is ROE Important For Earnings Growth?
So far, we’ve learned that ROE is a measure of a company’s profitability. 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. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don’t have the same features.
Nordic Entertainment Group’s Earnings Growth And 5.4% ROE
On the face of it, Nordic Entertainment Group’s ROE is not much to talk about. Next, when compared to the average industry ROE of 11%, the company’s ROE leaves us feeling even less enthusiastic. Although, we can see that Nordic Entertainment Group saw a modest net income growth of 18% over the past five years. So, the growth in the company’s earnings could probably have been caused by other variables. For instance, the company has a low payout ratio or is being managed efficiently.
As a next step, we compared Nordic Entertainment Group’s net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 17% 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. This then helps them determine if the stock is placed for a bright or bleak future. If you’re wondering about Nordic Entertainment Group’s’s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Nordic Entertainment Group Using Its Retained Earnings Effectively?
While the company did pay out a portion of its dividend in the past, it currently doesn’t pay a dividend. We infer that the company has been reinvesting all of its profits to grow its business.
On the whole, we do feel that Nordic Entertainment Group has some positive attributes. Despite its low rate of return, the fact that the company reinvests a very high portion of its profits into its business, no doubt contributed to its high earnings growth. Having said that, looking at the current analyst estimates, we found that the company’s earnings are expected to gain momentum. 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. 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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