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Why Genus plc’s (LON:GNS) ROE Of 16.09% Does Not Tell The Whole Story

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Genus plc’s (LSE:GNS) most recent return on equity was a substandard 16.09% relative to its industry performance of 16.09% over the past year. Though GNS’s recent performance is underwhelming, it is useful to understand what ROE is made up of and how it should be interpreted. Knowing these components can change your views on GNS’s below-average returns. Today I will look at how components such as financial leverage can influence ROE which may impact the sustainability of GNS’s returns. Check out our latest analysis for Genus

What you must know about ROE

Return on Equity (ROE) weighs Genus’s profit against the level of its shareholders’ equity. An ROE of 16.09% implies £0.16 returned on every £1 invested. In most cases, a higher ROE is preferred; however, there are many other factors we must consider prior to making any investment decisions.

Return on Equity = Net Profit ÷ Shareholders Equity

ROE is assessed against cost of equity, which is measured using the Capital Asset Pricing Model (CAPM) – but let’s not dive into the details of that today. For now, let’s just look at the cost of equity number for Genus, which is 8.30%. This means Genus returns enough to cover its own cost of equity, with a buffer of 7.79%. This sustainable practice implies that the company pays less for its capital than what it generates in return. ROE can be split up into three useful ratios: net profit margin, asset turnover, and financial leverage. This is called the Dupont Formula:

Dupont Formula

ROE = profit margin × asset turnover × financial leverage

ROE = (annual net profit ÷ sales) × (sales ÷ assets) × (assets ÷ shareholders’ equity)

ROE = annual net profit ÷ shareholders’ equity

LSE:GNS Last Perf Mar 4th 18
LSE:GNS Last Perf Mar 4th 18

The first component is profit margin, which measures how much of sales is retained after the company pays for all its expenses. Asset turnover reveals how much revenue can be generated from Genus’s asset base. And finally, financial leverage is simply how much of assets are funded by equity, which exhibits how sustainable the company’s capital structure is. Since ROE can be inflated by excessive debt, we need to examine Genus’s debt-to-equity level. Currently the debt-to-equity ratio stands at a low 33.34%, which means Genus still has headroom to take on more leverage in order to increase profits.

LSE:GNS Historical Debt Mar 4th 18
LSE:GNS Historical Debt Mar 4th 18

Next Steps:

ROE is a simple yet informative ratio, illustrating the various components that each measure the quality of the overall stock. While Genus exhibits a weak ROE against its peers, its returns are sufficient enough to cover its cost of equity. Its appropriate level of leverage means investors can be more confident in the sustainability of Genus’s return with a possible increase should the company decide to increase its debt levels. ROE is a helpful signal, but it is definitely not sufficient on its own to make an investment decision.

For Genus, I’ve put together three important aspects you should further examine:

  1. Financial Health: Does it have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.

  2. Valuation: What is Genus worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether Genus is currently mispriced by the market.

  3. Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of Genus? Explore our interactive list of stocks with large growth potential to get an idea of what else is out there you may be missing!


To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned.