Declining Stock and Decent Financials: Is The Market Wrong About KEPCO Plant Service & Engineering Co.,Ltd. (KRX:051600)?

With its stock down 5.1% over the past three months, it is easy to disregard KEPCO Plant Service & EngineeringLtd (KRX:051600). However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. Particularly, we will be paying attention to KEPCO Plant Service & EngineeringLtd's ROE today.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Check out our latest analysis for KEPCO Plant Service & EngineeringLtd

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 Plant Service & EngineeringLtd is:

12% = ₩121b ÷ ₩1.0t (Based on the trailing twelve months to September 2020).

The 'return' refers to a company's earnings over the last year. That means that for every ₩1 worth of shareholders' equity, the company generated ₩0.12 in profit.

What Has ROE Got To Do With Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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. 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.

KEPCO Plant Service & EngineeringLtd's Earnings Growth And 12% ROE

To begin with, KEPCO Plant Service & EngineeringLtd seems to have a respectable ROE. Further, the company's ROE is similar to the industry average of 11%. However, we are curious as to how KEPCO Plant Service & EngineeringLtd's decent returns still resulted in flat growth for KEPCO Plant Service & EngineeringLtd in the past five years. Based on this, we feel that there might be other reasons which haven't been discussed so far in this article that could be hampering the company's growth. For example, it could be that the company has a high payout ratio or the business has allocated capital poorly, for instance.

As a next step, we compared KEPCO Plant Service & EngineeringLtd'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 8.7% 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). This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about KEPCO Plant Service & EngineeringLtd's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is KEPCO Plant Service & EngineeringLtd Efficiently Re-investing Its Profits?

The high three-year median payout ratio of 54% (meaning, the company retains only 46% of profits) for KEPCO Plant Service & EngineeringLtd suggests that the company's earnings growth was miniscule as a result of paying out a majority of its earnings.

In addition, KEPCO Plant Service & EngineeringLtd has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth. Our latest analyst data shows that the future payout ratio of the company is expected to drop to 42% over the next three years. Despite the lower expected payout ratio, the company's ROE is not expected to change by much.

Summary

Overall, we feel that KEPCO Plant Service & EngineeringLtd certainly does have some positive factors to consider. However, while the company does have a high ROE, its earnings growth number is quite disappointing. This can be blamed on the fact that it reinvests only a small portion of its profits and pays out the rest as dividends. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

If you decide to trade KEPCO Plant Service & EngineeringLtd, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.