G8 Education Limited's (ASX:GEM) Earnings Dropped -13%, Did Its Industry Show Weakness Too?
In this article, I will take a look at G8 Education Limited's (ASX:GEM) most recent earnings update (31 December 2019) and compare these latest figures against its performance over the past few years, along with how the rest of GEM's industry performed. As a long-term investor, I find it useful to analyze the company's trend over time in order to estimate whether or not the company is able to meet its goals, and eventually grow sustainably over time.
Check out our latest analysis for G8 Education
Commentary On GEM's Past Performance
GEM's trailing twelve-month earnings (from 31 December 2019) of AU$63m has declined by -13% compared to the previous year.
Furthermore, this one-year growth rate has been lower than its average earnings growth rate over the past 5 years of -0.8%, indicating the rate at which GEM is growing has slowed down. What could be happening here? Well, let's look at what's transpiring with margins and if the rest of the industry is experiencing the hit as well.
In terms of returns from investment, G8 Education has fallen short of achieving a 20% return on equity (ROE), recording 7.5% instead. However, its return on assets (ROA) of 6.6% exceeds the AU Consumer Services industry of 5.4%, indicating G8 Education has used its assets more efficiently. Though, its return on capital (ROC), which also accounts for G8 Education’s debt level, has declined over the past 3 years from 15% to 8.2%. This correlates with an increase in debt holding, with debt-to-equity ratio rising from 40% to 46% over the past 5 years.
What does this mean?
While past data is useful, it doesn’t tell the whole story. Typically companies that face a prolonged period of diminishing earnings are undergoing some sort of reinvestment phase Though if the whole industry is struggling to grow over time, it may be a sign of a structural shift, which makes G8 Education and its peers a higher risk investment. I suggest you continue to research G8 Education to get a more holistic view of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for GEM’s future growth? Take a look at our free research report of analyst consensus for GEM’s outlook.
Financial Health: Are GEM’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you. Check out our financial health checks here.
Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
NB: Figures in this article are calculated using data from the trailing twelve months from 31 December 2019. This may not be consistent with full year annual report figures.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned.
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