Celltrion Pharm, Inc.'s (KOSDAQ:068760) Financials Are Too Obscure To Link With Current Share Price Momentum: What's In Store For the Stock?

Celltrion Pharm (KOSDAQ:068760) has had a great run on the share market with its stock up by a significant 32% over the last month. However, we decided to pay attention to the company's fundamentals which don't appear to give a clear sign about the company's financial health. Particularly, we will be paying attention to Celltrion Pharm's ROE today.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. 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 Celltrion Pharm

How To Calculate Return On Equity?

Return on equity 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 Celltrion Pharm is:

4.4% = ₩12b ÷ ₩286b (Based on the trailing twelve months to June 2020).

The 'return' is the income the business earned over the last year. Another way to think of that is that for every ₩1 worth of equity, the company was able to earn ₩0.04 in profit.

Why Is ROE Important For 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

Celltrion Pharm's Earnings Growth And 4.4% ROE

It is quite clear that Celltrion Pharm's ROE is rather low. Even when compared to the industry average of 7.1%, the ROE figure is pretty disappointing. Given the circumstances, the significant decline in net income by 11% seen by Celltrion Pharm over the last five years is not surprising. However, there could also be other factors causing the earnings to decline. For example, the business has allocated capital poorly, or that the company has a very high payout ratio.

So, as a next step, we compared Celltrion Pharm's performance against the industry and were disappointed to discover that while the company has been shrinking its earnings, the industry has been growing its earnings at a rate of 13% in the same period.

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. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Celltrion Pharm's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Celltrion Pharm Using Its Retained Earnings Effectively?

Summary

Overall, we have mixed feelings about Celltrion Pharm. 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. Wrapping up, we would proceed with caution with this company and one way of doing that would be to look at the risk profile of the business. To know the 3 risks we have identified for Celltrion Pharm visit our risks dashboard for free.

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