Is the recent performance of Genesis Energy Limited (NZSE: GNE) supported by weak financial data?


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With its stock down 13% in the past three months, it’s easy to overlook Genesis Energy (NZSE: GNE). We decided to study the company’s financial data to determine if the downward trend will continue, as a company’s long-term performance usually dictates market results. In this article, we have decided to focus on the ROE of Genesis Energy.

ROE or return on equity is a useful tool to assess how effectively a company can generate the returns on investment it has received from its shareholders. In other words, it reveals the company’s success in turning shareholders’ investments into profits.

Check out our latest review for Genesis Energy

How do you calculate return on equity?

Return on equity can be calculated using the formula:

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

So, based on the above formula, the ROE of Genesis Energy is:

1.6% = NZ $ 34 million ÷ NZ $ 2.1 billion (based on the last twelve months to June 2021).

The “return” is the amount earned after tax over the past twelve months. This means that for every NZ $ 1 worth of equity, the company generated NZ $ 0.02 in profit.

Why is ROE important for profit growth?

So far, we’ve learned that ROE measures how efficiently a business generates profits. Based on how much of those profits the company reinvests or “withholds” and its efficiency, we are then able to assess a company’s profit growth potential. Generally speaking, all other things being equal, companies with high return on equity and high profit retention have a higher growth rate than companies that do not share these attributes.

A side-by-side comparison of Genesis Energy’s 1.6% profit growth and ROE

It’s hard to say that Genesis Energy’s ROE is very good on its own. Not only that, even compared to the industry average of 5.4%, the company’s ROE is quite unremarkable. Therefore, it might not be wrong to say that the 33% drop in five-year net income seen by Genesis Energy may have been the result of lower ROE. We believe there could also be other aspects that negatively influence the company’s earnings outlook. For example, the company has a very high payout rate or faces competitive pressures.

So, in the next step, we compared the performance of Genesis Energy to that of the industry and were disappointed to find that if the company reduced its profits, the industry increased its profits at a rate of 2, 2% over the same period.

past profit growth

Profit growth is a huge factor in the valuation of stocks. It is important for an investor to know whether the market has factored in the expected growth (or decline) in company earnings. By doing this, they will have an idea if the stock is heading for clear blue waters or if swampy waters are waiting for them. If you’re wondering about Genesis Energy’s valuation, check out this gauge of its price / earnings ratio, relative to its industry.

Is Genesis Efficiently Reinvesting Its Profits?

Genesis Energy’s very high three-year median payout ratio of 412% over the past three years suggests the company is paying its shareholders more than it earns, which explains the company’s declining profits. Paying a dividend higher than declared profits is not a sustainable decision. To learn about the 5 risks we have identified for Genesis Energy, visit our free risk dashboard.

Additionally, Genesis Energy has paid dividends over a seven-year period, which means the company’s management is instead focused on sustaining its dividend payments, regardless of declining earnings. Our latest analyst data shows the company’s future payout ratio is expected to drop to 137% over the next three years. As a result, the expected drop in the payout ratio of Genesis Energy explains the anticipated increase in the company’s future ROE to 6.8%, over the same period.

Summary

All in all, we would have thought carefully before deciding on any investment action regarding Genesis Energy. In particular, his ROE is a huge disappointment, not to mention his lack of proper reinvestment in the business. As a result, its profit growth has also been quite disappointing. That said, looking at current analysts’ estimates, we found that the company’s earnings growth rate is expected to see a huge improvement. To learn more about the company’s future earnings growth forecast, take a look at this free analyst forecast report for the company to learn more.

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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only 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 goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.

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