It is hard to get excited after looking at Monarch Casino & Resort’s (NASDAQ:MCRI) recent performance, when its stock has declined 11% over the past month. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Particularly, we will be paying attention to Monarch Casino & Resort’s ROE today.
ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Put another way, it reveals the company’s success at turning shareholder investments into profits.
How To Calculate Return On Equity?
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 Monarch Casino & Resort is:
14% = US$73m ÷ US$518m (Based on the trailing twelve months to December 2024).
The ‘return’ is the income the business earned over the last year. So, this means that for every $1 of its shareholder’s investments, the company generates a profit of $0.14.
Check out our latest analysis for Monarch Casino & Resort
What Has ROE Got To Do With Earnings Growth?
So far, we’ve learned that ROE is a measure of a company’s profitability. 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.
Monarch Casino & Resort’s Earnings Growth And 14% ROE
At first glance, Monarch Casino & Resort seems to have a decent ROE. Further, the company’s ROE is similar to the industry average of 15%. This certainly adds some context to Monarch Casino & Resort’s exceptional 24% net income growth seen over the past five years. We believe that there might also be other aspects that are positively influencing the company’s earnings growth. Such as – high earnings retention or an efficient management in place.
Next, on comparing with the industry net income growth, we found that Monarch Casino & Resort’s reported growth was lower than the industry growth of 34% over the last few years, which is not something we like to see.
Earnings growth is a huge factor in stock valuation. 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. Is MCRI fairly valued? This infographic on the company’s intrinsic value has everything you need to know.
Is Monarch Casino & Resort Using Its Retained Earnings Effectively?
Monarch Casino & Resort’s three-year median payout ratio is a pretty moderate 26%, meaning the company retains 74% of its income. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like Monarch Casino & Resort is reinvesting its earnings efficiently.
While Monarch Casino & Resort has seen growth in its earnings, it only recently started to pay a dividend. It is most likely that the company decided to impress new and existing shareholders with a dividend. Based on the latest analysts’ estimates, we found that the company’s future payout ratio over the next three years is expected to hold steady at 24%. Accordingly, forecasts suggest that Monarch Casino & Resort’s future ROE will be 14% which is again, similar to the current ROE.
Conclusion
On the whole, we feel that Monarch Casino & Resort’s performance has been quite good. 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 a good amount of growth in its earnings. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.
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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.
