Stock Futures Today – Genesis Energy Limited’s (NZSE:GNE) Financial Prospects Don’t Look Very Positive: Could It Mean A Stock price Drop In The Future?
Genesis Energy’s (NZSE:GNE) stock is up by 5.9% over the past three months. However, its weak financial performance indicators makes us a bit doubtful if that trend could continue. Particularly, we will be paying attention to Genesis Energy’s ROE today.
Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In simpler terms, it measures the profitability of a company in relation to shareholder’s equity.
View our latest analysis for Genesis Energy
How Do You Calculate Return On Equity?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity
So, based on the above formula, the ROE for Genesis Energy is:
4.8% = NZ$90m ÷ NZ$1.9b (Based on the trailing twelve months to December 2020).
The ‘return’ is the profit over the last twelve months. So, this means that for every NZ$1 of its shareholder’s investments, the company generates a profit of NZ$0.05.
What Has ROE Got To Do With Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company’s future earnings. Based on how much of its profits the company chooses to reinvest or “retain”, we are then able to evaluate a company’s future ability to generate profits. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.
Genesis Energy’s Earnings Growth And 4.8% ROE
At first glance, Genesis Energy’s ROE doesn’t look very promising. A quick further study shows that the company’s ROE doesn’t compare favorably to the industry average of 6.9% either. Therefore, it might not be wrong to say that the five year net income decline of 28% seen by Genesis Energy was probably the result of it having a lower ROE. We believe that there also might be other aspects that are negatively influencing the company’s earnings prospects. Such as – low earnings retention or poor allocation of capital.
So, as a next step, we compared Genesis Energy’s performance against the industry and were disappointed to discover that while the company has been shrinking its earnings, the industry has been growing its earnings at a rate of 13% in the same period.
(The basis for attaching value to a company is, to a great extent, 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). Doing so will help them establish if the stock’s future looks promising or ominous. Is GNE fairly valued? This infographic on the company’s intrinsic value has everything you need to know.
Is Genesis Energy Using Its Retained Earnings Effectively?
Genesis Energy’s high three-year median payout ratio of 385% suggests that the company is depleting its resources to keep up its dividend payments, and this shows in its shrinking earnings. Paying a dividend beyond their means is usually not viable over the long term. Our risks dashboard should have the 2 risks we have identified for Genesis Energy.
Additionally, Genesis Energy has paid dividends over a period of seven years, which means that the company’s management is rather focused on keeping up its dividend payments, regardless of the shrinking earnings. Upon studying the latest analysts’ consensus data, we found that the company’s future payout ratio is expected to drop to 152% over the next three years. Accordingly, the expected drop in the payout ratio explains the expected increase in the company’s ROE to 6.5%, over the same period.
Summary
In total, we would have a hard think before deciding on any investment action concerning Genesis Energy. The low ROE, combined with the fact that the company is paying out almost if not all, of its profits as dividends, has resulted in the lack or absence of growth in its earnings. With that said, we studied the latest analyst forecasts and found that while the company has shrunk its earnings in the past, analysts expect its earnings to grow in the future. Are these analysts expectations based on the broad expectations for the industry, or on the company’s fundamentals? Click here to be taken to our analyst’s forecasts page for the company.
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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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Stock Futures Today – Genesis Energy Limited’s (NZSE:GNE) Financial Prospects Don’t Look Very Positive: Could It Mean A Stock price Drop In The Future?
