Daewoong Pharmaceutical Co., Ltd's (KRX:069620) Stock Is Going Strong: Have Financials A Role To Play?

Daewoong Pharmaceutical's (KRX:069620) stock is up by a considerable 33% over the past three months. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. In this article, we decided to focus on Daewoong Pharmaceutical's ROE.

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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

See our latest analysis for Daewoong Pharmaceutical

How Is ROE Calculated?

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 Daewoong Pharmaceutical is:

9.0% = ₩84b ÷ ₩935b (Based on the trailing twelve months to June 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 ₩0.09 in profit.

What Has ROE Got To Do With 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. 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.

Daewoong Pharmaceutical's Earnings Growth And 9.0% ROE

On the face of it, Daewoong Pharmaceutical's ROE is not much to talk about. However, given that the company's ROE is similar to the average industry ROE of 8.6%, we may spare it some thought. Particularly, the exceptional 54% net income growth seen by Daewoong Pharmaceutical over the past five years is pretty remarkable. Given the slightly low ROE, it is likely that there could be some other aspects that are driving this growth. For instance, the company has a low payout ratio or is being managed efficiently.

As a next step, we compared Daewoong Pharmaceutical's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 12%.

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Daewoong Pharmaceutical fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Daewoong Pharmaceutical Efficiently Re-investing Its Profits?

Daewoong Pharmaceutical's three-year median payout ratio to shareholders is 6.0%, which is quite low. This implies that the company is retaining 94% of its profits. So it looks like Daewoong Pharmaceutical is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Additionally, Daewoong Pharmaceutical has paid dividends over a period of five years which means that the company is pretty serious about sharing its profits with shareholders. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 6.5%. Still, forecasts suggest that Daewoong Pharmaceutical's future ROE will rise to 12% even though the the company's payout ratio is not expected to change by much.

Conclusion

Overall, we feel that Daewoong Pharmaceutical certainly does have some positive factors to consider. Despite its low rate of return, the fact that the company reinvests a very high portion of its profits into its business, no doubt contributed to its high earnings growth. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. 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.