Declining Stock and Decent Financials: Is The Market Wrong About KEPCO Engineering & Construction Company, Inc. (KRX:052690)?

KEPCO Engineering & Construction Company (KRX:052690) has had a rough week with its share price down 4.1%. However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. In this article, we decided to focus on KEPCO Engineering & Construction Company's ROE.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Put another way, it reveals the company's success at turning shareholder investments into profits.

See our latest analysis for KEPCO Engineering & Construction Company

How Is ROE Calculated?

The formula for return on equity is:

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

So, based on the above formula, the ROE for KEPCO Engineering & Construction Company is:

6.9% = ₩38b ÷ ₩547b (Based on the trailing twelve months to June 2024).

The 'return' is the yearly profit. One way to conceptualize this is that for each ₩1 of shareholders' capital it has, the company made ₩0.07 in profit.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.

KEPCO Engineering & Construction Company's Earnings Growth And 6.9% ROE

On the face of it, KEPCO Engineering & Construction Company's ROE is not much to talk about. Yet, a closer study shows that the company's ROE is similar to the industry average of 6.9%. Having said that, KEPCO Engineering & Construction Company has shown a modest net income growth of 18% over the past five years. Given the slightly low ROE, it is likely that there could be some other aspects that are driving this growth. For instance, the company has a low payout ratio or is being managed efficiently.

As a next step, we compared KEPCO Engineering & Construction Company's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 8.5%.

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 KEPCO Engineering & Construction Company is trading on a high P/E or a low P/E, relative to its industry.

Is KEPCO Engineering & Construction Company Using Its Retained Earnings Effectively?

KEPCO Engineering & Construction Company has a significant three-year median payout ratio of 53%, meaning that it is left with only 47% to reinvest into its business. This implies that the company has been able to achieve decent earnings growth despite returning most of its profits to shareholders.

Besides, KEPCO Engineering & Construction Company has been paying dividends over a period of three years. This shows that the company is committed to sharing profits with its shareholders. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 46%. Regardless, the future ROE for KEPCO Engineering & Construction Company is predicted to rise to 11% despite there being not much change expected in its payout ratio.

Summary

Overall, we feel that KEPCO Engineering & Construction Company certainly does have some positive factors to consider. While no doubt its earnings growth is pretty substantial, we do feel that the reinvestment rate is pretty low, meaning, the earnings growth number could have been significantly higher had the company been retaining more of its profits. The latest industry analyst forecasts show that the company is expected to maintain its current growth rate. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.