Englewood Lab, Inc. (KOSDAQ:950140) Stock Is Going Strong But Fundamentals Look Uncertain: What Lies Ahead ?

Englewood Lab (KOSDAQ:950140) has had a great run on the share market with its stock up by a significant 25% over the last three months. However, we wonder if the company's inconsistent financials would have any adverse impact on the current share price momentum. Specifically, we decided to study Englewood Lab's ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

View our latest analysis for Englewood Lab

How Is ROE Calculated?

Return on equity 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 Englewood Lab is:

3.2% = ₩2.0b ÷ ₩63b (Based on the trailing twelve months to September 2020).

The 'return' is the amount earned after tax over the last twelve months. That means that for every ₩1 worth of shareholders' equity, the company generated ₩0.03 in profit.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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.

Englewood Lab's Earnings Growth And 3.2% ROE

It is hard to argue that Englewood Lab's ROE is much good in and of itself. Not just that, even compared to the industry average of 15%, the company's ROE is entirely unremarkable. Therefore, the disappointing ROE therefore provides a background to Englewood Lab's very little net income growth of 4.3% over the past five years.

As a next step, we compared Englewood Lab's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 20% in the same period.

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Englewood Lab fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Englewood Lab Using Its Retained Earnings Effectively?

Summary

Overall, we have mixed feelings about Englewood Lab. Even though it appears to be retaining most of its profits, given the low ROE, investors may not be benefitting from all that reinvestment after all. The low earnings growth suggests our theory correct. 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. To know the 2 risks we have identified for Englewood Lab visit our risks dashboard for free.

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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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