Genuit Group plc (LON:GEN)’s dismal stock performance reflects weak fundamentals

Genuit Group (LON:GEN) had a tough three months, with its share price down 23%. To decide if this trend could continue, we decided to look at its weak fundamentals as they shape the long-term market trends. In this article, we have chosen to focus on Genuit Group‘s ROE.

ROE, or return on equity, is a useful tool for assessing how effectively a company is generating returns on the investment received from its shareholders. Put simply, it measures a company’s profitability in relation to its equity.

Check out our latest analysis for Genuit Group

How is ROE calculated?

The return on equity can be calculated using the following formula:

Return on Equity = Net Income (from continuing operations) ÷ Equity

So, based on the formula above, the ROE for the Genuit Group is:

7.5% = UK£47m ÷ UK£624m (Based on trailing 12 months to June 2022).

“Yield” refers to a company’s profits over the last year. This means that for every £1 of equity the company makes £0.08 of profit.

What does ROE have to do with earnings growth?

So far we’ve learned that ROE measures how efficiently a company generates its profits. Based on how much of its profits the company chooses to reinvest, or “retain,” we are then able to assess a company’s future ability to generate profits. Assuming all else remains the same, the higher the ROE and earnings retention, the higher a company’s growth rate compared to companies that don’t necessarily exhibit these characteristics.

A head-to-head comparison of Genuit Group earnings growth and 7.5% ROE

At first glance, Genuit Group’s ROE doesn’t look particularly attractive. We then compared the company’s ROE to the industry as a whole and were disappointed to find that the ROE is below the industry average of 14%. For that reason, the Genuit Group’s five-year net income decline of 6.2% is not surprising given the lower ROE. We assume that other factors could also play a role here. For example, the company has a very high payout ratio or is under competitive pressure.

However, we compared Genuit Group’s performance to the industry and were concerned to note that while the company has contracted earnings, the industry has grown earnings by 1.0% over the same period.

past earnings growth

Much of the basis for increasing the value of a company is tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company’s expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. What is GEN worth today? The intrinsic value infographic in our free research report helps visualize if GEN is currently mispriced by the market.

Is the Genuit Group using its retained earnings effectively?

With a high three-year median payout ratio of 56% (meaning 44% of earnings are retained), the majority of Genuit Group’s earnings are paid out to shareholders, which explains the company’s shrinking earnings. With very little left to reinvest in the business, earnings growth is far from likely.

Additionally, the Genuit Group has paid dividends over an eight-year period, meaning the company’s management is more focused on maintaining its dividend payments despite shrinking earnings. Our latest analyst data shows that the company’s future payout ratio is expected to drop to 40% over the next three years. Consequently, the expected decrease in Genuit Group’s payout ratio explains the expected increase in the company’s future ROE to 11% over the same period.

Conclusion

Overall, we would be extremely cautious before making any decision about Genuit Group. The company has experienced a lack of earnings growth as it retains very little earnings and what little it retains is reinvested at a very low rate of return. However, given the current analyst estimates, we noted that the company’s earnings growth rate is expected to see a huge improvement. To learn more about the company’s future earnings growth projections, take a look free Report on analyst forecasts for the company to learn more.

Do you have any feedback about this article? Concerned about the content? Get in touch directly with us. Alternatively, send an email to the editorial team (at) simplywallst.com.

This Simply Wall St article is of a general nature. We provide comments based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended as financial advice. It is not a recommendation to buy or sell any stock and does not take into account your goals or financial situation. Our goal is to offer you long-term focused analysis based on 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 position in any of the stocks mentioned.

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