Is Weakness In JW Pharmaceutical Corporation (KRX:001060) Stock A Sign That The Market Could be Wrong Given Its Strong Financial Prospects?

JW Pharmaceutical (KRX:001060) has had a rough three months with its share price down 19%. But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. Particularly, we will be paying attention to JW Pharmaceutical'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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

See our latest analysis for JW Pharmaceutical

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 JW Pharmaceutical is:

13% = ₩36b ÷ ₩283b (Based on the trailing twelve months to June 2024).

The 'return' is the income the business earned over the last year. So, this means that for every ₩1 of its shareholder's investments, the company generates a profit of ₩0.13.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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 JW Pharmaceutical's Earnings Growth And 13% ROE

At first glance, JW Pharmaceutical seems to have a decent ROE. On comparing with the average industry ROE of 8.7% the company's ROE looks pretty remarkable. This probably laid the ground for JW Pharmaceutical's significant 70% net income growth seen over the past five years. We reckon that there could also be other factors at play here. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

We then compared JW Pharmaceutical's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 12% in the same 5-year 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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. 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 JW Pharmaceutical is trading on a high P/E or a low P/E, relative to its industry.

Is JW Pharmaceutical Using Its Retained Earnings Effectively?

The three-year median payout ratio for JW Pharmaceutical is 25%, which is moderately low. The company is retaining the remaining 75%. So it seems that JW Pharmaceutical is reinvesting efficiently in a way that it sees impressive growth in its earnings (discussed above) and pays a dividend that's well covered.

Moreover, JW Pharmaceutical is determined to keep sharing its profits with shareholders which we infer from its long history of eight years of paying a dividend. Existing analyst estimates suggest that the company's future payout ratio is expected to drop to 9.7% over the next three years. Accordingly, the expected drop in the payout ratio explains the expected increase in the company's ROE to 23%, over the same period.

Conclusion

On the whole, we feel that JW Pharmaceutical's performance has been quite good. 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. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

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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.