The fundamentals of Generation Development Group Limited (ASX:GDG) look quite solid: could the market be wrong about the stock?
Generation Development Group Inc (ASX:GDG) had a tough week with its share price down 11%. But if you pay close attention, you might find that its leading financial indicators look pretty decent, which could mean the stock could potentially rise in the long run as markets generally reward more resilient long-term fundamentals. In particular, we’ll be paying close attention to Generation Development Group’s ROE today.
Return on equity or ROE is an important factor for a shareholder to consider as it tells them how much of their capital is being reinvested. In simple terms, it is used to assess the profitability of a company in relation to its equity.
Check out our latest analysis for Generation Development Group
How to calculate return on equity?
the ROE formula is:
Return on equity = Net income (from continuing operations) ÷ Equity
So, based on the above formula, the ROE for Generation Development Group is:
6.4% = AU$3.7 million ÷ AU$58 million (based on trailing 12 months to December 2021).
“Yield” refers to a company’s earnings over the past year. This means that for every Australian dollar of equity, the company generated a profit of 0.06 Australian dollars.
What is the relationship between ROE and earnings growth?
We have already established that ROE serves as an effective profit-generating indicator for a company’s future earnings. We now need to assess how much profit the company is reinvesting or “retaining” for future growth, which then gives us an idea of the company’s growth potential. Assuming everything else remains unchanged, the higher the ROE and earnings retention, the higher a company’s growth rate compared to companies that don’t necessarily exhibit these characteristics.
Profit growth and ROE of 6.4% from Generation Development Group
At first glance, Generation Development Group’s ROE does not look very promising. Then, compared to the industry average ROE of 9.9%, the company’s ROE leaves us even less excited. However, we can see that Generation Development Group has seen modest net profit growth of 18% over the past five years. Thus, the company’s earnings growth could likely have been caused by other variables. For example, the business has a low payout ratio or is efficiently managed.
In a next step, we compared the growth of Generation Development Group’s net income with the industry, and fortunately, we found that the growth observed by the company is higher than the average industry growth of 6.9 %
Earnings growth is an important factor in stock valuation. The investor should try to establish whether the expected growth or decline in earnings, as the case may be, is taken into account. This then helps them determine whether the action is placed for a bright or bleak future. If you’re wondering about the valuation of Generation Development Group, check out this indicator of its price/earnings ratio, relative to its sector.
Does Generation Development Group use its retained earnings effectively?
Generation Development Group has a large three-year median payout ratio of 78%, which means it only has 22% left to reinvest in its business. This implies that the company was able to achieve decent earnings growth despite returning most of its earnings to shareholders.
In addition, Generation Development Group paid dividends over a nine-year period. This shows that the company is committed to sharing profits with its shareholders. After reviewing the latest analyst consensus data, we found that the company’s future payout ratio is expected to drop to 52% over the next three years. Thus, the expected decline in the payout rate explains the expected increase in the company’s ROE to 15%, over the same period.
All in all, it seems that Generation Development Group has positive aspects in its activity. While its earnings growth is undoubtedly quite significant, we believe that the reinvestment rate is quite low, which means that the earnings growth figure could have been significantly higher had the company retained a greater part of its profits. That said, the latest analyst forecasts show that the company will continue to see earnings expansion. For more on the company’s future earnings growth forecast, check out 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 only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.