Is Pungguk Ethanol Industrial Co., Ltd's (KOSDAQ:023900) Recent Price Movement Underpinned By Its Weak Fundamentals?

With its stock down 6.3% over the past month, it is easy to disregard Pungguk Ethanol Industrial (KOSDAQ:023900). We, however decided to study the company's financials to determine if they have got anything to do with the price decline. Stock prices are usually driven by a company’s financial performance over the long term, and therefore we decided to pay more attention to the company's financial performance. Particularly, we will be paying attention to Pungguk Ethanol Industrial's ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Put another way, it reveals the company's success at turning shareholder investments into profits.

See our latest analysis for Pungguk Ethanol Industrial

How To 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 Pungguk Ethanol Industrial is:

5.7% = ₩8.7b ÷ ₩154b (Based on the trailing twelve months to September 2020).

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 ₩0.06 in profit.

What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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.

Pungguk Ethanol Industrial's Earnings Growth And 5.7% ROE

It is hard to argue that Pungguk Ethanol Industrial's ROE is much good in and of itself. Further, we noted that the company's ROE is similar to the industry average of 6.3%. The flat earnings by Pungguk Ethanol Industrial over the past five years could probably be the result of it having a lower ROE.

We then compared Pungguk Ethanol Industrial's performance with the industry and found that the company has shrunk its earnings at a slower rate than the industry earnings which has seen its earnings shrink by 2.6% in the same period. While this is not particularly good, its not particularly bad either.

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. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Pungguk Ethanol Industrial's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Pungguk Ethanol Industrial Efficiently Re-investing Its Profits?

Despite having a moderate three-year median payout ratio of 26% (meaning the company retains74% of profits) in the last three-year period, Pungguk Ethanol Industrial's earnings growth was more or les flat. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.

Additionally, Pungguk Ethanol Industrial has paid dividends over a period of at least ten years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth.

Summary

In total, we're a bit ambivalent about Pungguk Ethanol Industrial's performance. Even though it appears to be retaining most of its profits, given the low ROE, investors may not be benefitting from all that reinvestment after all. The low earnings growth suggests our theory correct. Up till now, we've only made a short study of the company's growth data. To gain further insights into Pungguk Ethanol Industrial's past profit growth, check out this visualization of past earnings, revenue and cash flows.

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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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