Simply Wall St

Falling Stocks and Decent Finances: Is the Market Wrong on Genetic Signatures Limited (ASX:GSS)?

With its stock down 15% in the past three months, it’s easy to overlook genetic signatures (ASX:GSS). However, stock prices are usually determined by a company’s long-term finances, which in this case seem quite respectable. Specifically, we decided to study the ROE of Genetic Signatures in this article.

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 other words, it is a profitability ratio that measures the rate of return on capital contributed by the company’s shareholders.

Our analysis indicates that GSS is potentially overrated!

How is ROE calculated?

The ROE formula is:

Return on equity = Net income (from continuing operations) ÷ Equity

So, based on the above formula, the ROE for genetic signatures is:

5.6% = AU$3.1 million ÷ AU$55 million (based on trailing 12 months to June 2022).

The “return” is the annual profit. Another way to think about this is that for every 1 Australian dollar of equity, the company was able to make a profit of 0.06 Australian dollars.

What does ROE have to do with earnings growth?

So far we have learned that ROE is a measure of a company’s profitability. 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 relative to companies that don’t necessarily exhibit these characteristics.

Growth of Genetic Signatures earnings and ROE of 5.6%

When you first look at it, Genetic Signatures’ ROE doesn’t look that appealing. A quick closer look shows that the company’s ROE also doesn’t compare favorably to the industry average of 12%. However, we are pleasantly surprised to see that Genetic Signatures has grown its net profit at a significant rate of 52% over the past five years. Thus, there could be other aspects that positively influence the profit growth of the company. Such as – high revenue retention or effective management in place.

Then, comparing Genetic Signatures’ net income growth with the industry, we found that the company’s reported growth is similar to the industry average growth rate of 43% over the same period.

past earnings-growth
ASX: GSS Past Earnings Growth November 22, 2022

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. Is Genetic Signatures valued at its fair value compared to other companies? These 3 assessment metrics might help you decide.

Does Genetic Signatures effectively reinvest its profits?

Since Genetic Signatures does not pay any dividends to its shareholders, we infer that the company has reinvested all of its profits to grow its business.


All in all, it seems that Genetic Signatures has positive aspects for its business. Despite its low rate of return, the fact that the company reinvests a very large portion of its profits back into its business no doubt contributed to the strong growth in its profits. That said, in studying the latest analyst forecasts, we found that while the company has seen growth in past earnings, analysts expect future earnings to decline. To learn more about the latest analyst forecasts for the company, check out this analyst forecast visualization for the company.

Valuation is complex, but we help make it simple.

Find out if Genetic signatures is potentially overvalued or undervalued by viewing our full analysis, which includes fair value estimates, risks and warnings, dividends, insider trading and financial health.

See the free analysis

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.

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