Shares in Nine Entertainment Holdings (ASX:NEC) have gained 4.6% over the past week. Given that share prices typically align with a company’s long-term financial performance, we decided to investigate whether the company’s sound financial health played a role in recent price movements. Specifically, we decided to study the ROE of Nine Entertainment Holdings in this article.
Return on Equity, or ROE, is a test of how effectively a company is increasing its value and managing investor money. Simply put, ROE shows the profit generated per dollar invested by its shareholders.
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How to calculate return on equity?
ROE can be calculated using the following formula:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity
Then, according to the above formula, the return on net assets of Jiuyu Holdings is:
15% = A$315m ÷ A$2.1b (based on past 12 months to June 2022).
“Return” is the after-tax income for the past twelve months. This means that for every A$1 worth of shareholders’ equity held by the company, it generates a profit of A$0.15.
What is the relationship between ROE and earnings growth?
We have established that ROE is an effective profit-generating metric for measuring a company’s future earnings. Based on how much of these profits the company reinvests, or “retains,” and how efficiently it does so, we are able to assess a company’s potential for profitable growth. In general, companies with high return on equity and profit retention have higher growth rates than companies without these attributes, other things being equal.
Nine Entertainment Holdings’ Earnings Growth and 15% ROE
At first glance, Nine Entertainment Holdings’ ROE appears to be good. Compared with the industry average ROE of 9.5%, the company’s ROE appears to be quite impressive. Nonetheless, Nine Entertainment Holdings’ five-year net income growth has been fairly flat over the past five years. We think there may be other factors at play here that limit the company’s growth. For example, the company pays out a significant portion of its earnings as dividends, or is facing competitive pressure.
We then compared the net profit growth rate of Jiuyu Holdings with the industry, and found that the company’s growth rate was similar to the industry’s average growth rate of 0.5% during the same period.
Earnings growth is an important factor in stock valuation. It’s important for investors to understand whether the market has priced in a company’s expected earnings growth (or decline). By doing this, they will know whether the stock is waiting in clear blue water or swampy waters. If you want to understand Nine Entertainment Holdings’ valuation, take a look at the price-to-earnings ratio metric compared to its industry.
Is Nine Entertainment Holdings using its profits efficiently?
With a high three-year median payout ratio of 91% (meaning the company retains only 9.4% of its revenue and reinvests it in its business), Nine Entertainment Holdings pays out most of its profits to shareholders, which explains the lack of revenue growth .
Additionally, Nine Entertainment Holdings has been paying a dividend for eight years, showing that keeping the dividend paid even at the expense of business growth is more important to management. The company’s payout ratio is expected to drop to 70% over the next three years, according to existing analyst estimates. However, despite the lower expected payout ratio, the company’s return on equity is not expected to change much.
Overall, we do feel there are some positives for Nine Entertainment Holdings. The company’s earnings grew modestly thanks to its impressive return on equity. However, the business retains hardly any profits. This could negatively affect the company’s future growth. That being said, the latest industry analyst forecasts point to an acceleration in the company’s earnings growth. To learn more about the company’s latest analyst forecasts, check out this visualization of the company’s analyst forecasts.
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This article by Simply Wall St is general in nature. We use only an unbiased methodology to provide reviews based on historical data and analyst forecasts, 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 into account your objectives or your financial situation. Our goal is to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative material. Simply Wall St has no positions in any of the stocks mentioned.