Greencross has a good idea, with some competitive advantage, and they should be able to generate a good margin. Can someone explain to me why they have a return on equity below 10%? If I look at the company they are patterned on Pets at Home in the UK (PETS.L), that company also has a sub-10% return on equity. Consider instead a retail pet play like the now-taken-private company Petsmart (was NASDAQ symbol PETM), which had return on equity numbers over 30% (!) with industry comparison return on equity over 20%.
If I look quickly into the Greencross financials, what immediately pops off the balance sheet is a huge number for Goodwill. And they are getting very poor financial returns for this. This suggests they are doing highly overpriced acquisitions and they do not get a good financial return on this. Maybe this suggests that the growth going forward should be internally generated rather than purchased from outside? That might have the effect of increasing return on equity over time.
But I am concerned why is PETS.L also showing the same low return on equity. PETS.L is a more mature company, and yet they still haven't improved their financial returns. What gives?
GXL Price at posting:
$6.90 Sentiment: Buy Disclosure: Not Held
