Declining Stock and Decent Financials: Is The Market Wrong About Shin Poong Pharm.Co.,Ltd. (KRX:019170)?

Shin Poong Pharm.Co.Ltd (KRX:019170) has had a rough three months with its share price down 36%. However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. Particularly, we will be paying attention to Shin Poong Pharm.Co.Ltd's ROE today.

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.

See our latest analysis for Shin Poong Pharm.Co.Ltd

How Do You 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 Shin Poong Pharm.Co.Ltd is:

1.5% = ₩5.7b ÷ ₩383b (Based on the trailing twelve months to September 2020).

The 'return' is the income the business earned over the last year. That means that for every ₩1 worth of shareholders' equity, the company generated ₩0.01 in profit.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.

Shin Poong Pharm.Co.Ltd's Earnings Growth And 1.5% ROE

It is quite clear that Shin Poong Pharm.Co.Ltd's ROE is rather low. Even compared to the average industry ROE of 7.6%, the company's ROE is quite dismal. Despite this, surprisingly, Shin Poong Pharm.Co.Ltd saw an exceptional 36% net income growth over the past five years. We reckon that there could be other factors at play here. For instance, the company has a low payout ratio or is being managed efficiently.

We then compared Shin Poong Pharm.Co.Ltd'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 14% in the same period.

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. 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 Shin Poong Pharm.Co.Ltd is trading on a high P/E or a low P/E, relative to its industry.

Is Shin Poong Pharm.Co.Ltd Making Efficient Use Of Its Profits?

Shin Poong Pharm.Co.Ltd doesn't pay any dividend currently which essentially means that it has been reinvesting all of its profits into the business. This definitely contributes to the high earnings growth number that we discussed above.

Summary

In total, it does look like Shin Poong Pharm.Co.Ltd has some positive aspects to its business. Even in spite of the low rate of return, the company has posted impressive earnings growth as a result of reinvesting heavily into its business. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. You can see the 3 risks we have identified for Shin Poong Pharm.Co.Ltd by visiting our risks dashboard for free on our platform here.

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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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