MegaStudyEdu Co. Ltd's (KOSDAQ:215200) Stock Is Going Strong: Is the Market Following Fundamentals?

MegaStudyEdu's (KOSDAQ:215200) stock is up by a considerable 14% 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 MegaStudyEdu'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. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Check out our latest analysis for MegaStudyEdu

How Do You Calculate Return On Equity?

Return on equity 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 MegaStudyEdu is:

14% = ₩36b ÷ ₩252b (Based on the trailing twelve months to June 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 ₩0.14 in profit.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

A Side By Side comparison of MegaStudyEdu's Earnings Growth And 14% ROE

To start with, MegaStudyEdu's ROE looks acceptable. Further, the company's ROE compares quite favorably to the industry average of 8.7%. This certainly adds some context to MegaStudyEdu's exceptional 53% net income growth seen over the past five years. We reckon that there could also be other factors at play here. For instance, the company has a low payout ratio or is being managed efficiently.

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.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. 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 MegaStudyEdu is trading on a high P/E or a low P/E, relative to its industry.

Is MegaStudyEdu Making Efficient Use Of Its Profits?

MegaStudyEdu's ' three-year median payout ratio is on the lower side at 24% implying that it is retaining a higher percentage (76%) of its profits. So it looks like MegaStudyEdu is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Along with seeing a growth in earnings, MegaStudyEdu only recently started paying dividends. Its quite possible that the company was looking to impress its shareholders. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 23%. However, MegaStudyEdu's ROE is predicted to rise to 24% despite there being no anticipated change in its payout ratio.

Conclusion

In total, we are pretty happy with MegaStudyEdu'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. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. 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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