With a Return on Equity of 39%, Is Dave & Buster’s Entertainment, Inc. (NASDAQ: PLAY ) a Quality Stock?

Many investors are still learning about the various indicators that may be useful when analyzing stocks. This article is for those who want to understand Return on Equity (ROE). To make the course practical, we will use ROE to better understand Dave & Buster’s Entertainment, Inc. (Nasdaq: Play).

Return on Equity, or ROE, is a key metric used to assess how effectively a company’s management is using the company’s capital. Simply put, ROE shows the profit generated per dollar invested by its shareholders.

Check out our latest analysis for Dave and Buster Entertainment

How to calculate ROE?

this ROE formula yes:

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

Therefore, according to the above formula, Dave & Buster’s Entertainment’s ROE is:

39% = $140 million ÷ $360 million (based on trailing 12 months to April 2023).

The “return” is the annual profit. This means that for every $1 in shareholders’ equity, the company generates $0.39 in profit.

Is Dave & Buster’s Entertainment’s ROE good?

An easy way to determine whether a company has a good return on equity is to compare it to the average for its industry. Importantly, this is far from a perfect measure, as companies within the same industry classification vary widely. As shown in the chart below, Dave & Buster’s Entertainment’s ROE is higher than the global average (17%) hotel industry.

This is clearly positive. However, keep in mind that a high ROE does not necessarily mean efficient profit generation. In addition to changes in net income, high return on equity may also be the result of high debt relative to equity, which indicates risk. Our Risk DashboardShould have the 2 risks we identified for Dave & Buster’s Entertainment.

The Importance of Debt to Return on Equity

Almost all companies need capital to invest in their business in order to increase their profits. This cash can come from issued stock, retained earnings or debt. In the first and second cases, ROE will reflect the cash invested in the business. In the latter case, the debt needed for growth will boost returns without affecting shareholder equity. So, figuratively speaking, the use of debt can enhance return on equity, despite the added risk in case of stormy weather.

Combine Dave & Buster’s Entertainment’s debt and its 39% return on equity

It appears that Dave & Buster’s Entertainment uses a lot of debt to finance its business, as it has a high debt-to-equity ratio of 3.42. Its ROE is apparently pretty good, but seems to be driven by the company’s heavy use of debt.

summarize

Return on equity helps to compare the quality of different businesses. The highest-quality companies on our books have higher returns on equity despite lower debt. All else being equal, the higher the ROE, the better.

But ROE is only a small piece of the larger puzzle, as high-quality businesses typically trade at high multiples of earnings. The rate at which profits are likely to grow relative to profit growth expectations reflected in current prices must also be considered.So you might want to check this out Data-rich interactive charts of company forecasts.

If you’d rather look at another company – one with potentially better financials – then don’t miss this free List of interesting companies with high return on equity and low debt.

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This article by Simply Wall St is general in nature. We use only an unbiased methodology to provide reviews based on historical data and analyst forecasts, 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. Our goal is to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative material. Simply Wall St has no positions in any of the stocks mentioned.