Does The Market Have A Low Tolerance For Wooridul Pharmaceutical Limited's (KRX:004720) Mixed Fundamentals?

It is hard to get excited after looking at Wooridul Pharmaceutical's (KRX:004720) recent performance, when its stock has declined 19% over the past three months. We, however decided to study the company's financials to determine if they have got anything to do with the price decline. Fundamentals usually dictate market outcomes so it makes sense to study the company's financials. Specifically, we decided to study Wooridul Pharmaceutical's ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Check out our latest analysis for Wooridul Pharmaceutical

How Is ROE Calculated?

The formula for return on equity is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Wooridul Pharmaceutical is:

2.7% = ₩2.1b ÷ ₩78b (Based on the trailing twelve months to September 2020).

The 'return' is the profit over the last twelve months. So, this means that for every ₩1 of its shareholder's investments, the company generates a profit of ₩0.03.

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. 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.

Wooridul Pharmaceutical's Earnings Growth And 2.7% ROE

As you can see, Wooridul Pharmaceutical's ROE looks pretty weak. Not just that, even compared to the industry average of 7.8%, the company's ROE is entirely unremarkable. Therefore, it might not be wrong to say that the five year net income decline of 3.8% seen by Wooridul Pharmaceutical was possibly a result of it having a lower ROE. However, there could also be other factors causing the earnings to decline. Such as - low earnings retention or poor allocation of capital.

That being said, we compared Wooridul Pharmaceutical's performance with the industry and were concerned when we found that while the company has shrunk its earnings, the industry has grown its earnings at a rate of 14% 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. Is Wooridul Pharmaceutical fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Wooridul Pharmaceutical Using Its Retained Earnings Effectively?

Conclusion

In total, we're a bit ambivalent about Wooridul Pharmaceutical's performance. 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. Our risks dashboard would have the 2 risks we have identified for Wooridul Pharmaceutical.

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This article by Simply Wall St is general in nature. 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.
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