Games Workshop Group (LON:GAW) has had a rough three months with its share price down 7.9%. But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. Particularly, we will be paying attention to Games Workshop Group'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. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

Check out our latest analysis for Games Workshop Group

How To Calculate Return On Equity?

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 Games Workshop Group is:

57% = UK￡140m ÷ UK￡246m (Based on the trailing twelve months to November 2023).

The 'return' is the yearly profit. So, this means that for every ￡1 of its shareholder's investments, the company generates a profit of ￡0.57.

What Has ROE Got To Do With Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.

Games Workshop Group's Earnings Growth And 57% ROE

To begin with, Games Workshop Group has a pretty high ROE which is interesting. Additionally, the company's ROE is higher compared to the industry average of 13% which is quite remarkable. Probably as a result of this, Games Workshop Group was able to see a decent net income growth of 16% over the last five years.

Next, on comparing with the industry net income growth, we found that Games Workshop Group's growth is quite high when compared to the industry average growth of 14% in the same period, which is great to see.

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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Games Workshop Group fairly valued compared to other companies? These 3 valuation measures might help you decide.