Eagle Veterinary Technology Co.,Ltd's (KOSDAQ:044960) Stock Is Rallying But Financials Look Ambiguous: Will The Momentum Continue?

Eagle Veterinary TechnologyLtd's (KOSDAQ:044960) stock is up by a considerable 11% over the past 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 Eagle Veterinary TechnologyLtd'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. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View our latest analysis for Eagle Veterinary TechnologyLtd

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 Eagle Veterinary TechnologyLtd is:

4.4% = ₩1.6b ÷ ₩37b (Based on the trailing twelve months to June 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 ₩0.04 in profit.

What Is The Relationship Between ROE And 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 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 Eagle Veterinary TechnologyLtd's Earnings Growth And 4.4% ROE

It is quite clear that Eagle Veterinary TechnologyLtd's ROE is rather low. Even compared to the average industry ROE of 7.1%, the company's ROE is quite dismal. Therefore, Eagle Veterinary TechnologyLtd's flat earnings over the past five years can possibly be explained by the low ROE amongst other factors.

As a next step, we compared Eagle Veterinary TechnologyLtd's net income growth with the industry and discovered that the industry saw an average growth of 13% in the same period.

Earnings growth is a huge factor in stock valuation. 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 Eagle Veterinary TechnologyLtd is trading on a high P/E or a low P/E, relative to its industry.

Is Eagle Veterinary TechnologyLtd Making Efficient Use Of Its Profits?

Eagle Veterinary TechnologyLtd doesn't pay any dividend, meaning that potentially all of its profits are being reinvested in the business. However, this doesn't explain why the company hasn't seen any growth. It looks like there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.

Summary

Overall, we have mixed feelings about Eagle Veterinary TechnologyLtd. 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. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. To gain further insights into Eagle Veterinary TechnologyLtd's past profit growth, check out this visualization of past earnings, revenue and cash flows.

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