Is World Wrestling Entertainment, Inc.’s (NYSE:WWE) Latest Stock Performance A Reflection Of Its Financial Health?

Most readers would already be aware that World Wrestling Entertainment’s (NYSE:WWE) stock increased significantly by 14% over the past three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Particularly, we will be paying attention to World Wrestling Entertainment’s ROE today.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

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How Is ROE Calculated?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity

So, based on the above formula, the ROE for World Wrestling Entertainment is:

47% = US$221m ÷ US$471m (Based on the trailing twelve months to September 2022).

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 $0.47 in profit.

What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company’s future earnings. 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.

World Wrestling Entertainment’s Earnings Growth And 47% ROE

To begin with, World Wrestling Entertainment has a pretty high ROE which is interesting. Secondly, even when compared to the industry average of 13% the company’s ROE is quite impressive. So, the substantial 32% net income growth seen by World Wrestling Entertainment over the past five years isn’t overly surprising.

Next, on comparing with the industry net income growth, we found that World Wrestling Entertainment’s growth is quite high when compared to the industry average growth of 20% in the same period, which is great to see.

NYSE:WWE Past Earnings Growth November 22nd 2022

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company’s expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you’re wondering about World Wrestling Entertainment’s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is World Wrestling Entertainment Efficiently Re-investing Its Profits?

World Wrestling Entertainment has a three-year median payout ratio of 26% (where it is retaining 74% of its income) which is not too low or not too high. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like World Wrestling Entertainment is reinvesting its earnings efficiently.

Moreover, World Wrestling Entertainment is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Our latest analyst data shows that the future payout ratio of the company is expected to drop to 12% over the next three years. Despite the lower expected payout ratio, the company’s ROE is not expected to change by much.

Conclusion

In total, we are pretty happy with World Wrestling Entertainment’s performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. That being so, a study of the latest analyst forecasts shows 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.

Valuation is complex, but we’re helping make it simple.

Find out whether World Wrestling Entertainment is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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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 into account 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.

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