ALL share price in focus
Founded by Len Ainsworth in 1953, Aristocrat Leisure is an Australian gambling machine operator that is headquartered in Sydney.
Aristocrat is currently the largest gambling machine manufacturer in Australia and one of the largest manufacturers of slot machines around the world. However, that’s just one part of the business. Aristocrat also makes online games. This segment has grown steadily to make up nearly half its total revenue.
Gaming machines can be sold outright to a venue or gaming operator. Alternatively, a machine can be installed with a proportion of the revenue generated being paid on a recurring basis back to Aristocrat.
Let’s talk profits
If you’ve ever tried reading a company’s income statement on the annual report, you’ll know just how complex it can get. While there are any number of ways you could slice up the statement, three key figures are revenue, gross margin, and profit.
Revenue is important for obvious reasons – everything else (profit, margins, return on equity etc.) is downstream of a company’s ability to generate sales and revenue. What we’re looking for is not so much the absolute number, but the trend. ALL last reported an annual revenue of $6,485m with a compound annual growth rate (CAGR) over the last 3 years of 11.0% per year.
The next thing we’ll want to consider is the gross margin. The gross margin tells us how profitable the core products/services are – before you take into account all the overhead costs, how much money does the company make from selling $100 worth of goods and services? ALL’s latest reported gross margin was 58.0%.
Finally, we get to profit, the real headline number. Last financial year Aristocrat Leisure Limited reported a profit of $1,512m. That compares to 3 years ago when they made a profit of $1,378m, representing a CAGR of 3.2%.
A pulse check on ALL shares
Next, we could consider the capital health of the company. What we’re trying to work out is whether the company is generating a reasonable return on their equity (the total shareholder value) and whether they have a good safety buffer. One important measure to consider is net debt. This is simply the total debt minus the company’s cash holdings.
In the case of ALL, the current net debt sits at -$70m. A high number here means that a company has a lot of debt which potentially means higher interest payments, greater instability, and higher sensitivity to interest rates. A negative value on the other hand indicates the company has more cash than debt, which can be seen as good (a big safety buffer) or bad (inefficient capital allocation).
Another figure we can look at is the debt/equity percentage. This tells us how much debt the company has relative to shareholder ownership. In other words, how leveraged is the company? Aristocrat Leisure Limited has a debt/equity ratio of 39.9%, which means they have more equity than debt.
Finally, we can look at the return on equity (ROE). The ROE tells us how much profit a company is generating as a percentage of its total equity – high numbers indicate the company is allocating capital efficiently and generating value, while a low number suggests that company growth may be starting to slow. ALL generated an ROE of 22.8% in FY24.
What to make of ALL shares?
As a growth company, one way to put a general prediction on the ALL share price could be to compare its price-to-sales multiple over time. Currently, Aristocrat Leisure Limited shares have a price-sales ratio of 5.75x, compared to its 5-year average of 4.87x, meaning its shares are trading higher than their historical average. This could mean that the share price has increased, or that sales have declined, or both. In the case of ALL, revenue has been growing over the last 3 years. Please keep in mind that context is important – and this is just one valuation technique. Investment decisions can’t just be based on one metric.
The Rask websites offer free online investing courses, created by analysts explaining things like Discounted Cash Flow (DCF) and Dividend Discount Models (DDM). They even include free valuation spreadsheets! Both of these models would be a better way to value the ALL share price.
