Is CHOSUN WELDING POHANG Co., Ltd's (KRX:120030) Recent Stock Performance Influenced By Its Financials In Any Way?

CHOSUN WELDING POHANG's (KRX:120030) stock up by 3.4% over the past three months. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. Specifically, we decided to study CHOSUN WELDING POHANG'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 CHOSUN WELDING POHANG

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 CHOSUN WELDING POHANG is:

9.9% = ₩11b ÷ ₩116b (Based on the trailing twelve months to September 2020).

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 ₩0.10 in profit.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.

A Side By Side comparison of CHOSUN WELDING POHANG's Earnings Growth And 9.9% ROE

At first glance, CHOSUN WELDING POHANG's ROE doesn't look very promising. Although a closer study shows that the company's ROE is higher than the industry average of 3.7% which we definitely can't overlook. However, CHOSUN WELDING POHANG's five year net income decline rate was 3.8%. Remember, the company's ROE is a bit low to begin with, just that it is higher than the industry average. Hence, this goes some way in explaining the shrinking earnings.

With the industry earnings declining at a rate of 4.5% in the same period, we deduce that both the company and the industry are shrinking at the same rate.

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. What is A120030 worth today? The intrinsic value infographic in our free research report helps visualize whether A120030 is currently mispriced by the market.

Is CHOSUN WELDING POHANG Efficiently Re-investing Its Profits?

Summary

On the whole, we do feel that CHOSUN WELDING POHANG has some positive attributes. However, while the company does have a decent ROE and a high profit retention, its earnings growth number is quite disappointing. This suggests that there might be some external threat to the business, that's hampering growth. 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 1 risk we have identified for CHOSUN WELDING POHANG 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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