Declining Stock and Solid Fundamentals: Is The Market Wrong About GEN Restaurant Group, Inc. (NASDAQ:GENK)?

GEN Restaurant Group, Inc. -2.03% Pre

GEN Restaurant Group, Inc.

GENK

9.19

9.19

-2.03%

0.00% Pre

It is hard to get excited after looking at GEN Restaurant Group's (NASDAQ:GENK) recent performance, when its stock has declined 33% over the past three months. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Particularly, we will be paying attention to GEN Restaurant Group's ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for GEN Restaurant Group

How To Calculate Return On Equity?

Return on equity can be calculated by using the formula:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for GEN Restaurant Group is:

34% = US$12m ÷ US$35m (Based on the trailing twelve months to September 2023).

The 'return' is the yearly profit. That means that for every $1 worth of shareholders' equity, the company generated $0.34 in profit.

What Is The Relationship Between ROE And 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. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

GEN Restaurant Group's Earnings Growth And 34% ROE

First thing first, we like that GEN Restaurant Group has an impressive ROE. Secondly, even when compared to the industry average of 16% the company's ROE is quite impressive. This likely paved the way for the modest 6.5% net income growth seen by GEN Restaurant Group over the past five years.

Next, on comparing with the industry net income growth, we found that GEN Restaurant Group's reported growth was lower than the industry growth of 19% over the last few years, which is not something we like to see.

past-earnings-growth
NasdaqGM:GENK Past Earnings Growth December 30th 2023

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if GEN Restaurant Group is trading on a high P/E or a low P/E, relative to its industry.

Is GEN Restaurant Group Making Efficient Use Of Its Profits?

Given that GEN Restaurant Group doesn't pay any dividend to its shareholders, we infer that the company has been reinvesting all of its profits to grow its business.

Conclusion

In total, we are pretty happy with GEN Restaurant Group's performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. As a result, the decent growth in its earnings is not surprising. With that said, on studying the latest analyst forecasts, we found that while the company has seen growth in its past earnings, analysts expect its future earnings to shrink. 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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