Daejung Chemicals & Metals Co.,Ltd.'s (KOSDAQ:120240) Stock is Soaring But Financials Seem Inconsistent: Will The Uptrend Continue?

Daejung Chemicals & MetalsLtd's (KOSDAQ:120240) stock is up by a considerable 26% 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 Daejung Chemicals & MetalsLtd'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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

Check out our latest analysis for Daejung Chemicals & MetalsLtd

How Do You Calculate Return On Equity?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Daejung Chemicals & MetalsLtd is:

4.7% = ₩5.9b ÷ ₩125b (Based on the trailing twelve months to September 2020).

The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each ₩1 of shareholders' capital it has, the company made ₩0.05 in profit.

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

Daejung Chemicals & MetalsLtd's Earnings Growth And 4.7% ROE

It is quite clear that Daejung Chemicals & MetalsLtd's ROE is rather low. Not just that, even compared to the industry average of 7.9%, the company's ROE is entirely unremarkable. Hence, the flat earnings seen by Daejung Chemicals & MetalsLtd over the past five years could probably be the result of it having a lower ROE.

We then compared Daejung Chemicals & MetalsLtd's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 7.6% in the same period, which is a bit concerning.

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. If you're wondering about Daejung Chemicals & MetalsLtd's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Daejung Chemicals & MetalsLtd Making Efficient Use Of Its Profits?

Summary

Overall, we have mixed feelings about Daejung Chemicals & MetalsLtd. While the company does have a high rate of profit retention, its low rate of return is probably hampering its earnings growth. Up till now, we've only made a short study of the company's growth data. So it may be worth checking this free detailed graph of Daejung Chemicals & MetalsLtd's past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.

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