Does CLIO Cosmetics Co.,Ltd's (KOSDAQ:237880) Weak Fundamentals Mean That The Market Could Correct Its Share Price?

By
Simply Wall St
Published
February 02, 2021
KOSDAQ:A237880
Source: Shutterstock

Most readers would already be aware that CLIO CosmeticsLtd's (KOSDAQ:237880) stock increased significantly by 22% over the past three months. We, however wanted to have a closer look at its key financial indicators as the markets usually pay for long-term fundamentals, and in this case, they don't look very promising. Specifically, we decided to study CLIO CosmeticsLtd's ROE in this article.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

Check out our latest analysis for CLIO CosmeticsLtd

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 CLIO CosmeticsLtd is:

3.0% = ₩4.6b ÷ ₩153b (Based on the trailing twelve months to September 2020).

The 'return' is the yearly profit. That means that for every ₩1 worth of shareholders' equity, the company generated ₩0.03 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. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.

CLIO CosmeticsLtd's Earnings Growth And 3.0% ROE

As you can see, CLIO CosmeticsLtd's ROE looks pretty weak. Not just that, even compared to the industry average of 4.4%, the company's ROE is entirely unremarkable. Given the circumstances, the significant decline in net income by 48% seen by CLIO CosmeticsLtd over the last five years is not surprising. We believe that there also might be other aspects that are negatively influencing the company's earnings prospects. For instance, the company has a very high payout ratio, or is faced with competitive pressures.

Furthermore, even when compared to the industry, which has been shrinking its earnings at a rate 5.2% in the same period, we found that CLIO CosmeticsLtd's performance is pretty disappointing, as it suggests that the company has been shrunk its earnings at a rate faster than the industry.

past-earnings-growth
KOSDAQ:A237880 Past Earnings Growth February 3rd 2021

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. Is CLIO CosmeticsLtd fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is CLIO CosmeticsLtd Using Its Retained Earnings Effectively?

With a high three-year median payout ratio of 72% (implying that 28% of the profits are retained), most of CLIO CosmeticsLtd's profits are being paid to shareholders, which explains the company's shrinking earnings. The business is only left with a small pool of capital to reinvest - A vicious cycle that doesn't benefit the company in the long-run.

Moreover, CLIO CosmeticsLtd has been paying dividends for three years, which is a considerable amount of time, suggesting that management must have perceived that the shareholders prefer consistent dividends even though earnings have been shrinking. Existing analyst estimates suggest that the company's future payout ratio is expected to drop to 20% over the next three years. The fact that the company's ROE is expected to rise to 11% over the same period is explained by the drop in the payout ratio.

Summary

Overall, we would be extremely cautious before making any decision on CLIO CosmeticsLtd. As a result of its low ROE and lack of mich reinvestment into the business, the company has seen a disappointing earnings growth rate. That being so, the latest industry analyst forecasts show that the analysts are expecting to see a huge improvement in the company's earnings growth rate. 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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