Kyungin Synthetic Co., Ltd.'s (KRX:012610) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?

With its stock down 12% over the past three months, it is easy to disregard Kyungin Synthetic (KRX:012610). But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. Specifically, we decided to study Kyungin Synthetic's ROE in this article.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

View our latest analysis for Kyungin Synthetic

How Do You Calculate Return On Equity?

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 Kyungin Synthetic is:

2.7% = ₩6.3b ÷ ₩234b (Based on the trailing twelve months to June 2020).

The 'return' refers to a company's earnings over the last year. So, this means that for every ₩1 of its shareholder's investments, the company generates a profit of ₩0.03.

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. 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.

Kyungin Synthetic's Earnings Growth And 2.7% ROE

It is hard to argue that Kyungin Synthetic's ROE is much good in and of itself. Not just that, even compared to the industry average of 8.4%, the company's ROE is entirely unremarkable. Despite this, surprisingly, Kyungin Synthetic saw an exceptional 39% net income growth over the past five years. Therefore, there could be other reasons behind this growth. Such as - high earnings retention or an efficient management in place.

As a next step, we compared Kyungin Synthetic's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 3.4%.

Earnings growth is an important metric to consider when valuing a stock. 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. 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 Kyungin Synthetic is trading on a high P/E or a low P/E, relative to its industry.

Is Kyungin Synthetic Using Its Retained Earnings Effectively?

Kyungin Synthetic has a really low three-year median payout ratio of 15%, meaning that it has the remaining 85% left over to reinvest into its business. So it looks like Kyungin Synthetic is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Besides, Kyungin Synthetic has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders.

Conclusion

In total, it does look like Kyungin Synthetic has some positive aspects to its business. With a high rate of reinvestment, albeit at a low ROE, the company has managed to see a considerable growth in its earnings. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. To know the 3 risks we have identified for Kyungin Synthetic visit our risks dashboard for free.

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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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