Games Workshop Group's (LON:GAW) stock is up by 8.2% over the past three months. Since the market usually pay for a company’s long-term financial health, we decided to study the company’s fundamentals to see if they could be influencing the market. Specifically, we decided to study Games Workshop Group's ROE in this article.

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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Check out our latest analysis for Games Workshop Group

How Do You 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 Games Workshop Group is:

60% = UK￡151m ÷ UK￡251m (Based on the trailing twelve months to June 2024).

The 'return' is the profit over the last twelve months. Another way to think of that is that for every ￡1 worth of equity, the company was able to earn ￡0.60 in profit.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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 everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

Games Workshop Group's Earnings Growth And 60% ROE

Firstly, we acknowledge that Games Workshop Group has a significantly high ROE. Secondly, even when compared to the industry average of 18% the company's ROE is quite impressive. Probably as a result of this, Games Workshop Group was able to see a decent net income growth of 15% over the last five years.

We then performed a comparison between Games Workshop Group's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 15% in the same 5-year period.

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. Is Games Workshop Group fairly valued compared to other companies? These 3 valuation measures might help you decide.