Is the recent price movement of Penn National Gaming, Inc. (NASDAQ:PENN) supported by its weak fundamentals?

With its stock down 39% in the past three months, it’s easy to overlook Penn National Gaming (NASDAQ:PENN). It seems that the market has completely ignored the positive aspects of the company’s fundamentals and decided to weigh more on the negatives. Stock prices are usually determined by a company’s financial performance over the long term, and so we decided to pay more attention to the company’s financial performance. Specifically, we decided to study the ROE of Penn National Gaming in this article.

Return on equity or ROE is an important factor for a shareholder to consider as it tells them how much of their capital is being reinvested. In other words, it is a profitability ratio that measures the rate of return on capital contributed by the company’s shareholders.

Check out our latest analysis for Penn National Gaming

How is ROE calculated?

The ROE formula is:

Return on equity = Net income (from continuing operations) ÷ Equity

So, based on the above formula, the ROE for Penn National Gaming is:

9.6% = $381 million ÷ $4.0 billion (based on trailing 12 months to March 2022).

The “yield” is the profit of the last twelve months. One way to conceptualize this is that for every $1 of share capital it has, the firm has made a profit of $0.10.

Why is ROE important for earnings growth?

So far we have learned that ROE is a measure of a company’s profitability. We now need to assess how much profit the company is reinvesting or “retaining” for future growth, which then gives us an idea of ​​the company’s growth potential. Assuming everything else remains unchanged, the higher the ROE and earnings retention, the higher a company’s growth rate compared to companies that don’t necessarily exhibit these characteristics.

Penn National Gaming earnings growth and ROE of 9.6%

At first glance, there isn’t much to say about Penn National Gaming’s ROE. We then compared the company’s ROE to the entire industry and were disappointed to see that the ROE is below the industry average of 19%. Therefore, it might not be wrong to say that the 19% drop in net income over five years that Penn National Gaming saw was likely the result of lower ROE. We believe there could be other factors at play here as well. Such as – low income retention or poor capital allocation.

In a next step, we benchmarked Penn National Gaming’s performance against the industry and found that Penn National Gaming’s performance is depressing even against the industry, which cut profits at a rate of 0.9 % over the same period, which is slower than the company.

NasdaqGS:PENN Past Earnings Growth June 18, 2022

The basis for attaching value to a company is, to a large extent, linked to the growth of its profits. What investors then need to determine is whether the expected earnings growth, or lack thereof, is already priced into the stock price. This then helps them determine if the stock is positioned for a bright or bleak future. A good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings outlook. So, you might want to check if Penn National Gaming is trading on a high P/E or a low P/E, relative to its industry.

Does Penn National Gaming use its profits efficiently?

Since Penn National Gaming pays no dividends, we infer that it keeps all of its earnings, which is rather confusing considering that there’s no earnings growth to show. It seems that there could be other reasons for the lack in this regard. For example, the business might be in decline.


Overall, we have mixed feelings about Penn National Gaming. Although the company has a high reinvestment rate, the low ROE means that all this reinvestment does not benefit its investors and, moreover, it has a negative impact on earnings growth. That being the case, the latest forecasts from industry analysts show that analysts are expecting a huge improvement in the company’s earnings growth rate. For more on the company’s future earnings growth forecast, check out this free analyst forecast report for the company to learn more.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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