Is CLASSYS Inc.'s (KOSDAQ:214150) Stock's Recent Performance Being Led By Its Attractive Financial Prospects?

CLASSYS (KOSDAQ:214150) has had a great run on the share market with its stock up by a significant 9.4% over the last month. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Particularly, we will be paying attention to CLASSYS' ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

See our latest analysis for CLASSYS

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 CLASSYS is:

32% = ₩35b ÷ ₩111b (Based on the trailing twelve months to September 2020).

The 'return' is the yearly profit. Another way to think of that is that for every ₩1 worth of equity, the company was able to earn ₩0.32 in profit.

What Has ROE Got To Do With Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.

CLASSYS' Earnings Growth And 32% ROE

To begin with, CLASSYS has a pretty high ROE which is interesting. Secondly, even when compared to the industry average of 11% the company's ROE is quite impressive. Under the circumstances, CLASSYS' considerable five year net income growth of 69% was to be expected.

We then compared CLASSYS' 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 11% 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. Is A214150 fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is CLASSYS Making Efficient Use Of Its Profits?

CLASSYS' ' three-year median payout ratio is on the lower side at 8.3% implying that it is retaining a higher percentage (92%) of its profits. So it looks like CLASSYS is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Along with seeing a growth in earnings, CLASSYS only recently started paying dividends. Its quite possible that the company was looking to impress its shareholders. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 8.9% of its profits over the next three years. As a result, CLASSYS' ROE is not expected to change by much either, which we inferred from the analyst estimate of 31% for future ROE.

Summary

Overall, we are quite pleased with CLASSYS' performance. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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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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