Is KEPCO Plant Service & Engineering Co.,Ltd.'s (KRX:051600) Recent Stock Performance Influenced By Its Financials In Any Way?

Most readers would already know that KEPCO Plant Service & EngineeringLtd's (KRX:051600) stock increased by 7.9% over the past three months. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to investigate if the company's decent financials had a hand to play in the recent price move. In this article, we decided to focus on KEPCO Plant Service & EngineeringLtd's ROE.

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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

Check out our latest analysis for KEPCO Plant Service & EngineeringLtd

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 KEPCO Plant Service & EngineeringLtd is:

14% = ₩179b ÷ ₩1.3t (Based on the trailing twelve months to June 2024).

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 ₩0.14 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. 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.

KEPCO Plant Service & EngineeringLtd's Earnings Growth And 14% ROE

To begin with, KEPCO Plant Service & EngineeringLtd seems to have a respectable ROE. Especially when compared to the industry average of 9.2% the company's ROE looks pretty impressive. Given the circumstances, we can't help but wonder why KEPCO Plant Service & EngineeringLtd saw little to no growth in the past five years. Therefore, there could be some other aspects that could potentially be preventing the company from growing. These include low earnings retention or poor allocation of capital.

Next, on comparing with the industry net income growth, we found that the industry grew its earnings by 12% over the last few years.

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. What is A051600 worth today? The intrinsic value infographic in our free research report helps visualize whether A051600 is currently mispriced by the market.

Is KEPCO Plant Service & EngineeringLtd Making Efficient Use Of Its Profits?

The high three-year median payout ratio of 55% (meaning, the company retains only 45% 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 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. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 56% of its profits over the next three years. Therefore, the company's future ROE is also not expected to change by much with analysts predicting an ROE of 13%.

Conclusion

Overall, we feel that KEPCO Plant Service & EngineeringLtd certainly does have some positive factors to consider. Although, we are disappointed to see a lack of growth in earnings even in spite of a high ROE. Bear in mind, the company reinvests a small portion of its profits, which means that investors aren't reaping the benefits of the high rate of return. That being so, the latest industry analyst forecasts show that the analysts are expecting to see a slight improvement in the company's earnings growth. 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.