It can be challenging to feel optimistic about Monarch Casino & Resort’s (NASDAQ:MCRI) recent performance, especially given that its stock has dropped 11% in the past month. However, stock prices are typically influenced by a company’s long-term financial performance, which appears to be quite encouraging in this case. We will focus on Monarch Casino & Resort’s return on equity (ROE) today.
Understanding ROE
Return on equity (ROE) is an important metric that helps evaluate how efficiently a company can generate returns from the investments made by its shareholders. Essentially, it reflects the company’s effectiveness in converting shareholder equity into profits.
Calculating Return on Equity
ROE is calculated using the following formula:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity
Using this formula, the ROE for Monarch Casino & Resort stands at:
14% = US$73m ÷ US$518m (based on the twelve months ending December 2024).
This signifies that for every dollar of investment from shareholders, the company generates 14 cents in profit.
ROE and Earnings Growth
Understanding ROE gives insight into a company’s profitability. By assessing how much profit the company reinvests or “retains,” we can gauge its future profit-generating potential. Generally, companies with higher ROE and profit retention tend to have greater growth rates than those lacking these attributes.
Monarch Casino & Resort’s ROE and Earnings Growth
At first glance, Monarch Casino & Resort showcases a decent ROE of 14%, which is close to the industry average of 15%. This context is significant considering the company’s impressive net income growth of 24% over the past five years. There are likely other factors, such as strong earnings retention or effective management, contributing positively to this growth.
However, it is worth noting that Monarch Casino & Resort’s reported growth lags behind the industry’s growth of 34%, which raises some concerns.
Effective Use of Retained Earnings
The company has a three-year median payout ratio of 26%, indicating it retains 74% of its income. This suggests a well-covered dividend, and given the high growth rates discussed earlier, it seems Monarch Casino & Resort is efficiently reinvesting its earnings. Notably, while the company has begun paying dividends, it did so relatively recently, likely as a strategy to attract new and existing shareholders. Analysts predict that the future payout ratio will stabilize at 24%, with ROE expected to remain at 14%.
Conclusion
Overall, Monarch Casino & Resort is performing relatively well, particularly due to its strategy of reinvesting a significant portion of its profits at a high return rate, contributing to its earnings growth. However, forecasts suggest that future earnings growth may slow down. To explore more about the latest analyst expectations for the company, take a look at this visualization of analyst forecasts.
