Could The Market Be Wrong About Ten Square Games S.A. (WSE:TEN) Given Its Attractive Financial Prospects?

It is hard to get excited after looking at Ten Square Games' (WSE:TEN) recent performance, when its stock has declined 22% over the past three months. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Specifically, we decided to study Ten Square Games' 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.

See our latest analysis for Ten Square Games

How To 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 Ten Square Games is:

78% = zł155m ÷ zł199m (Based on the trailing twelve months to September 2020).

The 'return' refers to a company's earnings over the last year. That means that for every PLN1 worth of shareholders' equity, the company generated PLN0.78 in profit.

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.

Ten Square Games' Earnings Growth And 78% ROE

First thing first, we like that Ten Square Games has an impressive ROE. Second, a comparison with the average ROE reported by the industry of 24% also doesn't go unnoticed by us. So, the substantial 60% net income growth seen by Ten Square Games over the past five years isn't overly surprising.

Next, on comparing with the industry net income growth, we found that Ten Square Games' growth is quite high when compared to the industry average growth of 30% in the same period, which is great to see.

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). This then helps them determine if the stock is placed for a bright or bleak future. Is TEN fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Ten Square Games Making Efficient Use Of Its Profits?

Ten Square Games has a three-year median payout ratio of 43% (where it is retaining 57% of its income) which is not too low or not too high. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like Ten Square Games is reinvesting its earnings efficiently.

Along with seeing a growth in earnings, Ten Square Games only recently started paying dividends. Its quite possible that the company was looking to impress its shareholders. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 35% of its profits over the next three years. Accordingly, forecasts suggest that Ten Square Games' future ROE will be 62% which is again, similar to the current ROE.

Conclusion

Overall, we are quite pleased with Ten Square Games' performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page 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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