Amorepacific Corporation's (KRX:090430) Stock Is Rallying But Financials Look Ambiguous: Will The Momentum Continue?

Amorepacific's (KRX:090430) stock is up by a considerable 20% over the past three months. But the company's key financial indicators appear to be differing across the board and that makes us question whether or not the company's current share price momentum can be maintained. Specifically, we decided to study Amorepacific'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. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

View our latest analysis for Amorepacific

How Is ROE Calculated?

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 Amorepacific is:

0.5% = ₩23b ÷ ₩4.5t (Based on the trailing twelve months to September 2020).

The 'return' is the profit over the last twelve months. Another way to think of that is that for every ₩1 worth of equity, the company was able to earn ₩0.01 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. 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 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.

A Side By Side comparison of Amorepacific's Earnings Growth And 0.5% ROE

It is hard to argue that Amorepacific's ROE is much good in and of itself. Even when compared to the industry average of 4.4%, the ROE figure is pretty disappointing. Given the circumstances, the significant decline in net income by 30% seen by Amorepacific 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 example, the business has allocated capital poorly, or that the company has a very high payout ratio.

Next, when we compared with the industry, which has shrunk its earnings at a rate of 5.2% in the same period, we still found Amorepacific's performance to be quite bleak, because the company has been shrinking its earnings faster than the industry.

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. 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 Amorepacific is trading on a high P/E or a low P/E, relative to its industry.

Is Amorepacific Efficiently Re-investing Its Profits?

Despite having a normal three-year median payout ratio of 34% (where it is retaining 66% of its profits), Amorepacific has seen a decline in earnings as we saw above. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.

Additionally, Amorepacific 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. Existing analyst estimates suggest that the company's future payout ratio is expected to drop to 24% over the next three years. As a result, the expected drop in Amorepacific's payout ratio explains the anticipated rise in the company's future ROE to 7.4%, over the same period.

Summary

In total, we're a bit ambivalent about Amorepacific's performance. While the company does have a high rate of reinvestment, the low ROE means that all that reinvestment is not reaping any benefit to its investors, and moreover, its having a negative impact on the earnings growth. With that said, we studied the latest analyst forecasts and found that while the company has shrunk its earnings in the past, analysts expect its earnings to grow in the future. 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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