Aekyung Petrochemical Co., Ltd.'s (KRX:161000) Stock is Soaring But Financials Seem Inconsistent: Will The Uptrend Continue?

Aekyung Petrochemical (KRX:161000) has had a great run on the share market with its stock up by a significant 18% 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. Particularly, we will be paying attention to Aekyung Petrochemical's ROE today.

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. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out our latest analysis for Aekyung Petrochemical

How To 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 Aekyung Petrochemical is:

7.7% = ₩30b ÷ ₩385b (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 ₩0.08 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. 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 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.

Aekyung Petrochemical's Earnings Growth And 7.7% ROE

On the face of it, Aekyung Petrochemical's ROE is not much to talk about. Yet, a closer study shows that the company's ROE is similar to the industry average of 8.1%. Still, Aekyung Petrochemical has seen a flat net income growth over the past five years. Remember, the company's ROE is not particularly great to begin with. So that could also be one of the reasons behind the company's flat growth in earnings.

Next, on comparing with the industry net income growth, we found that Aekyung Petrochemical's reported growth was lower than the industry growth of 7.7% in the same period, which is not something we like to see.

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. 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 Aekyung Petrochemical's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Aekyung Petrochemical Making Efficient Use Of Its Profits?

In spite of a normal three-year median payout ratio of 35% (or a retention ratio of 65%), Aekyung Petrochemical hasn't seen much growth in its earnings. So there could be some other explanation in that regard. For instance, the company's business may be deteriorating.

Additionally, Aekyung Petrochemical has paid dividends over a period of seven years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth.

Summary

In total, we're a bit ambivalent about Aekyung Petrochemical's performance. While the company does have a high rate of profit retention, its low rate of return is probably hampering its earnings growth. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. So it may be worth checking this free detailed graph of Aekyung Petrochemical's past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.

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