Do Its Financials Have Any Role To Play In Driving Aristocrat Leisure Limited's (ASX:ALL) Stock Up Recently?

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Most readers would already be aware that Aristocrat Leisure's (ASX:ALL) stock increased significantly by 5.0% over the past week. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. Specifically, we decided to study Aristocrat Leisure's ROE in this article.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors' money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.
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The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Aristocrat Leisure is:
16% = AU$1.2b ÷ AU$7.2b (Based on the trailing twelve months to March 2025).
The 'return' is the income the business earned over the last year. So, this means that for every A$1 of its shareholder's investments, the company generates a profit of A$0.16.
View our latest analysis for Aristocrat Leisure
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 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.
To start with, Aristocrat Leisure's ROE looks acceptable. Further, the company's ROE compares quite favorably to the industry average of 8.0%. However, for some reason, the higher returns aren't reflected in Aristocrat Leisure's meagre five year net income growth average of 4.4%. This is generally not the case as when a company has a high rate of return it should usually also have a high earnings growth rate. We reckon that a low growth, when returns are quite high could be the result of certain circumstances like low earnings retention or poor allocation of capital.
As a next step, we compared Aristocrat Leisure's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 41% in the same period.
Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. Has the market priced in the future outlook for ALL? You can find out in our latest intrinsic value infographic research report.
While Aristocrat Leisure has a decent three-year median payout ratio of 34% (or a retention ratio of 66%), it has seen very little growth in earnings. Therefore, there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.
Moreover, Aristocrat Leisure has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 33%. Still, forecasts suggest that Aristocrat Leisure's future ROE will rise to 26% even though the the company's payout ratio is not expected to change by much.
Overall, we feel that Aristocrat Leisure certainly does have some positive factors to consider. However, given the high ROE and high profit retention, we would expect the company to be delivering strong earnings growth, but that isn't the case here. This suggests that there might be some external threat to the business, that's hampering its growth. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.
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