AMOREPACIFIC Group's (KRX:002790) Stock is Soaring But Financials Seem Inconsistent: Will The Uptrend Continue?

AMOREPACIFIC Group (KRX:002790) has had a great run on the share market with its stock up by a significant 22% over the last three months. However, we wonder if the company's inconsistent financials would have any adverse impact on the current share price momentum. Specifically, we decided to study AMOREPACIFIC Group's ROE in this article.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Put another way, it reveals the company's success at turning shareholder investments into profits.

See our latest analysis for AMOREPACIFIC Group

How Is ROE Calculated?

ROE 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 AMOREPACIFIC Group is:

3.6% = ₩235b ÷ ₩6.5t (Based on the trailing twelve months to December 2023).

The 'return' is the income the business earned over the last year. That means that for every ₩1 worth of shareholders' equity, the company generated ₩0.04 in profit.

Why Is ROE Important For Earnings Growth?

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

AMOREPACIFIC Group's Earnings Growth And 3.6% ROE

As you can see, AMOREPACIFIC Group's ROE looks pretty weak. Not just that, even compared to the industry average of 6.9%, the company's ROE is entirely unremarkable. For this reason, AMOREPACIFIC Group's five year net income decline of 10% is not surprising given its lower ROE. However, there could also be other factors causing the earnings to decline. For instance, the company has a very high payout ratio, or is faced with competitive pressures.

So, as a next step, we compared AMOREPACIFIC Group's performance against the industry and were disappointed to discover that while the company has been shrinking its earnings, the industry has been growing its earnings at a rate of 3.4% over the last few years.

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about AMOREPACIFIC Group's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is AMOREPACIFIC Group Using Its Retained Earnings Effectively?

Looking at its three-year median payout ratio of 26% (or a retention ratio of 74%) which is pretty normal, AMOREPACIFIC Group's declining earnings is rather baffling as one would expect to see a fair bit of growth when a company is retaining a good portion of its profits. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.

In addition, AMOREPACIFIC Group has been paying dividends over a period of eight years suggesting that keeping up dividend payments is preferred by the management even though earnings have been in decline. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to drop to 10% over the next three years. The fact that the company's ROE is expected to rise to 7.8% over the same period is explained by the drop in the payout ratio.

Summary

Overall, we have mixed feelings about AMOREPACIFIC Group. 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. Having said that, looking at current analyst estimates, we found that the company's earnings growth rate is expected to see a huge improvement. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.