Is Kwang Myung Electric Co.,Ltd's (KRX:017040) Recent Stock Performance Influenced By Its Fundamentals In Any Way?

Kwang Myung ElectricLtd (KRX:017040) has had a great run on the share market with its stock up by a significant 12% over the last month. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. Particularly, we will be paying attention to Kwang Myung ElectricLtd's ROE today.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for Kwang Myung ElectricLtd

How Do You Calculate Return On Equity?

The formula for ROE is:

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

So, based on the above formula, the ROE for Kwang Myung ElectricLtd is:

5.4% = ₩5.9b ÷ ₩109b (Based on the trailing twelve months to September 2020).

The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each ₩1 of shareholders' capital it has, the company made ₩0.05 in profit.

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

A Side By Side comparison of Kwang Myung ElectricLtd's Earnings Growth And 5.4% ROE

As you can see, Kwang Myung ElectricLtd's ROE looks pretty weak. An industry comparison shows that the company's ROE is not much different from the industry average of 5.6% either. Moreover, we are quite pleased to see that Kwang Myung ElectricLtd's net income grew significantly at a rate of 29% over the last five years. Given the low ROE, it is likely that there could be some other reasons behind this growth as well. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

We then compared Kwang Myung ElectricLtd's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 3.6% in the same period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. Is Kwang Myung ElectricLtd fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Kwang Myung ElectricLtd Making Efficient Use Of Its Profits?

Kwang Myung ElectricLtd's three-year median payout ratio to shareholders is 9.1%, which is quite low. This implies that the company is retaining 91% of its profits. This suggests that the management is reinvesting most of the profits to grow the business as evidenced by the growth seen by the company.

While Kwang Myung ElectricLtd has been growing its earnings, it only recently started to pay dividends which likely means that the company decided to impress new and existing shareholders with a dividend.

Conclusion

Overall, we feel that Kwang Myung ElectricLtd certainly does have some positive factors to consider. With a high rate of reinvestment, albeit at a low ROE, the company has managed to see a considerable growth in its earnings. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. You can see the 1 risk we have identified for Kwang Myung ElectricLtd by visiting our risks dashboard for free on our platform here.

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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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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