Yahoo Finance Will Weakness in PENN Entertainment, Inc.'s (NASDAQ:PENN) Stock Prove Temporary Given Strong Fundamentals?
PENN Entertainment (NASDAQ:PENN) has had a rough three months with its share price down 8.7%. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. In this article, we decided to focus on PENN Entertainment's 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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
Check out our latest analysis for PENN Entertainment
How Is ROE Calculated?
The formula for return on equity is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for PENN Entertainment is:
16% = US$685m ÷ US$4.2b (Based on the trailing twelve months to March 2023).
The 'return' is the yearly profit. That means that for every $1 worth of shareholders' equity, the company generated $0.16 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. 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. 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.
PENN Entertainment's Earnings Growth And 16% ROE
At first glance, PENN Entertainment seems to have a decent ROE. Even when compared to the industry average of 17% the company's ROE looks quite decent. This probably goes some way in explaining PENN Entertainment's moderate 15% growth over the past five years amongst other factors.
As a next step, we compared PENN Entertainment's net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 15% in the same period.
Earnings growth is an important metric to consider when valuing a stock. 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 PENN Entertainment is trading on a high P/E or a low P/E, relative to its industry.
Is PENN Entertainment Efficiently Re-investing Its Profits?
PENN Entertainment doesn't pay any dividend, meaning that all of its profits are being reinvested in the business, which explains the fair bit of earnings growth the company has seen.
Conclusion
In total, we are pretty happy with PENN Entertainment's performance. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. Having said that, on studying current analyst estimates, we were concerned to see that while the company has grown its earnings in the past, analysts expect its earnings to shrink in the future. 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.
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