Korea Electronic Certification Authority, Inc.'s (KOSDAQ:041460) Stock Is Rallying But Financials Look Ambiguous: Will The Momentum Continue?

Most readers would already be aware that Korea Electronic Certification Authority's (KOSDAQ:041460) stock increased significantly by 14% over the past month. But the company's key financial indicators appear to be differing across the board and that makes us question whether or not the company's current share price momentum can be maintained. Particularly, we will be paying attention to Korea Electronic Certification Authority's ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

Check out our latest analysis for Korea Electronic Certification Authority

How To Calculate Return On Equity?

ROE 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 Korea Electronic Certification Authority is:

3.3% = ₩1.8b ÷ ₩54b (Based on the trailing twelve months to September 2024).

The 'return' is the profit over the last twelve months. One way to conceptualize this is that for each ₩1 of shareholders' capital it has, the company made ₩0.03 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. 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 everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

Korea Electronic Certification Authority's Earnings Growth And 3.3% ROE

It is quite clear that Korea Electronic Certification Authority's ROE is rather low. Even when compared to the industry average of 9.3%, the ROE figure is pretty disappointing. Therefore, the disappointing ROE therefore provides a background to Korea Electronic Certification Authority's very little net income growth of 3.0% over the past five years.

We then performed a comparison between Korea Electronic Certification Authority's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 2.8% in the same 5-year period.

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Korea Electronic Certification Authority fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Korea Electronic Certification Authority Efficiently Re-investing Its Profits?

With a high three-year median payout ratio of 65% (or a retention ratio of 35%), most of Korea Electronic Certification Authority's profits are being paid to shareholders. This definitely contributes to the low earnings growth seen by the company.

In addition, Korea Electronic Certification Authority has been paying dividends over a period of five years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth.

Summary

In total, we're a bit ambivalent about Korea Electronic Certification Authority's performance. While no doubt its earnings growth is pretty respectable, the low profit retention could mean that the company's earnings growth could have been higher, had it been paying reinvesting a higher portion of its profits. An improvement in its ROE could also help future earnings growth. Wrapping up, we would proceed with caution with this company and one way of doing that would be to look at the risk profile of the business. You can see the 1 risk we have identified for Korea Electronic Certification Authority 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. 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.