Is MegaStudyEdu Co. Ltd's (KOSDAQ:215200) Recent Stock Performance Influenced By Its Fundamentals In Any Way?

MegaStudyEdu's (KOSDAQ:215200) stock is up by a considerable 47% over the past three months. As most would know, fundamentals are what usually guide market price movements over the long-term, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. In this article, we decided to focus on MegaStudyEdu's ROE.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

Check out our latest analysis for MegaStudyEdu

How Do You Calculate Return On Equity?

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 MegaStudyEdu is:

8.4% = ₩23b ÷ ₩276b (Based on the trailing twelve months to September 2020).

The 'return' is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each ₩1 of shareholders' capital it has, the company made ₩0.08 in profit.

Why Is ROE Important For Earnings Growth?

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

MegaStudyEdu's Earnings Growth And 8.4% ROE

When you first look at it, MegaStudyEdu's ROE doesn't look that attractive. Yet, a closer study shows that the company's ROE is similar to the industry average of 8.2%. Moreover, we are quite pleased to see that MegaStudyEdu's net income grew significantly at a rate of 43% over the last five years. Taking into consideration that the ROE is not particularly high, we reckon that there could also be other factors at play which could be influencing the company's growth. Such as - high earnings retention or an efficient management in place.

We then compared MegaStudyEdu's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 10.0% in the same period.

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is MegaStudyEdu fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is MegaStudyEdu Using Its Retained Earnings Effectively?

The three-year median payout ratio for MegaStudyEdu is 26%, which is moderately low. The company is retaining the remaining 74%. By the looks of it, the dividend is well covered and MegaStudyEdu is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

While MegaStudyEdu has seen growth in its earnings, it only recently started to pay a dividend. It is most likely that the company decided to impress new and existing shareholders with a dividend. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to drop to 21% over the next three years. As a result, the expected drop in MegaStudyEdu's payout ratio explains the anticipated rise in the company's future ROE to 26%, over the same period.

Summary

On the whole, we do feel that MegaStudyEdu has some positive attributes. Even in spite of the low rate of return, the company has posted impressive earnings growth as a result of reinvesting heavily into its business. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. 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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