Games Operators S.A.'s (WSE:GOP) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?

By
Simply Wall St
Published
January 25, 2022
WSE:GOP
Source: Shutterstock

It is hard to get excited after looking at Games Operators' (WSE:GOP) recent performance, when its stock has declined 23% over the past three months. However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. Particularly, we will be paying attention to Games Operators' ROE today.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Check out our latest analysis for Games Operators

How Do You Calculate Return On Equity?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Games Operators is:

15% = zł2.7m ÷ zł18m (Based on the trailing twelve months to September 2021).

The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each PLN1 of shareholders' capital it has, the company made PLN0.15 in profit.

What Has ROE Got To Do With Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.

Games Operators' Earnings Growth And 15% ROE

To begin with, Games Operators seems to have a respectable ROE. Even so, when compared with the average industry ROE of 24%, we aren't very excited. However, the moderate 15% net income growth seen by Games Operators over the past five years is definitely a positive. We reckon that there could be other factors at play here. For instance, the company has a low payout ratio or is being managed efficiently. However, not to forget, the company does have a decent ROE to begin with, just that it is lower than the industry average. So this also does lend some color to the fairly high earnings growth seen by the company.

As a next step, we compared Games Operators' net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 43% in the same period.

past-earnings-growth
WSE:GOP Past Earnings Growth January 25th 2022

Earnings growth is an important metric to consider when valuing a stock. 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 Games Operators''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Games Operators Using Its Retained Earnings Effectively?

While Games Operators has a three-year median payout ratio of 80% (which means it retains 20% of profits), the company has still seen a fair bit of earnings growth in the past, meaning that its high payout ratio hasn't hampered its ability to grow.

Along with seeing a growth in earnings, Games Operators only recently started paying dividends. Its quite possible that the company was looking to impress its shareholders.

Summary

On the whole, we do feel that Games Operators has some positive attributes. Its earnings have grown respectably as we saw earlier, which was likely achieved by the company reinvesting its earnings at a decent rate of return. Still, its earnings retention is quite low, so we wonder if the company's growth could be higher, were it to pay out less dividends and retain more of its profits? Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. You can do your own research on Games Operators and see how it has performed in the past by looking at this FREE detailed graph of past earnings, revenue and cash flows.

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