Is Fractal Gaming Group AB (publ)'s (STO:FRACTL) Recent Stock Performance Tethered To Its Strong Fundamentals?

Most readers would already be aware that Fractal Gaming Group's (STO:FRACTL) stock increased significantly by 25% over the past three months. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. Particularly, we will be paying attention to Fractal Gaming Group's ROE today.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out our latest analysis for Fractal Gaming Group

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 Fractal Gaming Group is:

23% = kr89m ÷ kr394m (Based on the trailing twelve months to March 2024).

The 'return' is the amount earned after tax over the last twelve months. Another way to think of that is that for every SEK1 worth of equity, the company was able to earn SEK0.23 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. 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.

A Side By Side comparison of Fractal Gaming Group's Earnings Growth And 23% ROE

First thing first, we like that Fractal Gaming Group has an impressive ROE. Additionally, the company's ROE is higher compared to the industry average of 7.7% which is quite remarkable. Under the circumstances, Fractal Gaming Group's considerable five year net income growth of 23% was to be expected.

As a next step, we compared Fractal Gaming Group's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 8.2%.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Fractal Gaming Group is trading on a high P/E or a low P/E, relative to its industry.

Is Fractal Gaming Group Using Its Retained Earnings Effectively?

Given that Fractal Gaming Group doesn't pay any regular dividends to its shareholders, we infer that the company has been reinvesting all of its profits to grow its business.

Conclusion

Overall, we are quite pleased with Fractal Gaming Group's performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology 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 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.