Stock Analysis

# Are Strong Financial Prospects The Force That Is Driving The Momentum In Paseco Co. Ltd's KOSDAQ:037070) Stock?

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Most readers would already be aware that Paseco's (KOSDAQ:037070) stock increased significantly by 16% over the past three months. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. In this article, we decided to focus on Paseco's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

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### How Do You 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 Paseco is:

16% = ₩14b ÷ ₩84b (Based on the trailing twelve months to September 2020).

The 'return' is the income the business earned over the last year. Another way to think of that is that for every ₩1 worth of equity, the company was able to earn ₩0.16 in profit.

### What Is The Relationship Between ROE And Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.

### A Side By Side comparison of Paseco's Earnings Growth And 16% ROE

To begin with, Paseco seems to have a respectable ROE. Further, the company's ROE compares quite favorably to the industry average of 6.6%. Probably as a result of this, Paseco was able to see an impressive net income growth of 22% over the last five years. However, there could also be other causes behind this growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

Given that the industry shrunk its earnings at a rate of 2.1% in the same period, the net income growth of the company is quite impressive.

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. 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 Paseco is trading on a high P/E or a low P/E, relative to its industry.

### Is Paseco Using Its Retained Earnings Effectively?

Given that Paseco doesn't pay any dividend to its shareholders, we infer that the company has been reinvesting all of its profits to grow its business.

### Summary

Overall, we are quite pleased with Paseco's performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth.

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