With its stock down 24% over the past month, it is easy to disregard Qiiwi Games (NGM:QIIWI). However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. In this article, we decided to focus on Qiiwi Games' ROE.
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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.
How Is ROE Calculated?
Return on equity 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 Qiiwi Games is:
41% = kr10m ÷ kr24m (Based on the trailing twelve months to September 2020).
The 'return' is the income the business earned over the last year. That means that for every SEK1 worth of shareholders' equity, the company generated SEK0.41 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. 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.
Qiiwi Games' Earnings Growth And 41% ROE
First thing first, we like that Qiiwi Games has an impressive ROE. Secondly, even when compared to the industry average of 18% the company's ROE is quite impressive. Under the circumstances, Qiiwi Games' considerable five year net income growth of 48% was to be expected.
We then compared Qiiwi Games' net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 30% in the same period.
Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Qiiwi Games''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Qiiwi Games Using Its Retained Earnings Effectively?
Overall, we are quite pleased with Qiiwi 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. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Not to forget, share price outcomes are also dependent on the potential risks a company may face. So it is important for investors to be aware of the risks involved in the business. To know the 3 risks we have identified for Qiiwi Games visit our risks dashboard for free.
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