Will Weakness in High Tech Pharm Co., Ltd.'s (KOSDAQ:106190) Stock Prove Temporary Given Strong Fundamentals?

With its stock down 11% over the past week, it is easy to disregard High Tech Pharm (KOSDAQ:106190). However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Particularly, we will be paying attention to High Tech Pharm's ROE today.

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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

How Is ROE Calculated?

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 High Tech Pharm is:

11% = ₩14b ÷ ₩120b (Based on the trailing twelve months to December 2024).

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 ₩0.11 in profit.

Check out our latest analysis for High Tech Pharm

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. 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. 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.

High Tech Pharm's Earnings Growth And 11% ROE

To begin with, High Tech Pharm seems to have a respectable ROE. Further, the company's ROE compares quite favorably to the industry average of 7.6%. This probably laid the ground for High Tech Pharm's significant 73% net income growth seen over the past five years. However, there could also be other causes behind this growth. For instance, the company has a low payout ratio or is being managed efficiently.

Next, on comparing with the industry net income growth, we found that High Tech Pharm's growth is quite high when compared to the industry average growth of 6.0% in the same period, which is great 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. This then helps them determine if the stock is placed for a bright or bleak future. Is High Tech Pharm fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is High Tech Pharm Using Its Retained Earnings Effectively?

Conclusion

In total, we are pretty happy with High Tech Pharm's performance. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.