Is CHUNGDAHM Learning, Inc.'s (KOSDAQ:096240) Stock Price Struggling As A Result Of Its Mixed Financials?

CHUNGDAHM Learning (KOSDAQ:096240) has had a rough month with its share price down 13%. We, however decided to study the company's financials to determine if they have got anything to do with the price decline. Fundamentals usually dictate market outcomes so it makes sense to study the company's financials. In this article, we decided to focus on CHUNGDAHM Learning's ROE.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out our latest analysis for CHUNGDAHM Learning

How Do You Calculate Return On Equity?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for CHUNGDAHM Learning is:

6.4% = ₩6.5b ÷ ₩102b (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 ₩0.06 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. 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.

CHUNGDAHM Learning's Earnings Growth And 6.4% ROE

At first glance, CHUNGDAHM Learning's ROE doesn't look very promising. We then compared the company's ROE to the broader industry and were disappointed to see that the ROE is lower than the industry average of 8.2%. However, we we're pleasantly surprised to see that CHUNGDAHM Learning grew its net income at a significant rate of 40% in the last five years. We reckon that there could be other factors at play here. 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.

Next, on comparing with the industry net income growth, we found that CHUNGDAHM Learning's growth is quite high when compared to the industry average growth of 10.0% in the same period, which is great to see.

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. Is CHUNGDAHM Learning fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is CHUNGDAHM Learning Using Its Retained Earnings Effectively?

CHUNGDAHM Learning's very high three-year median payout ratio of 141% suggests that the company is paying more to its shareholders than what it is earning. Despite this, the company's earnings grew significantly as we saw above. Having said that, the high payout ratio is definitely risky and something to keep an eye on. Our risks dashboard should have the 5 risks we have identified for CHUNGDAHM Learning.

Additionally, CHUNGDAHM Learning has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Our latest analyst data shows that the future payout ratio of the company is expected to drop to 57% over the next three years. As a result, the expected drop in CHUNGDAHM Learning's payout ratio explains the anticipated rise in the company's future ROE to 30%, over the same period.

Summary

In total, we're a bit ambivalent about CHUNGDAHM Learning's performance. Although the company has shown a pretty impressive growth in earnings, yet the low ROE and the low rate of reinvestment makes us skeptical about the continuity of that growth, especially when or if the business comes to face any threats. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

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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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