Declining Stock and Solid Fundamentals: Is The Market Wrong About Chong Kun Dang Pharmaceutical Corp. (KRX:185750)?

It is hard to get excited after looking at Chong Kun Dang Pharmaceutical's (KRX:185750) recent performance, when its stock has declined 14% over the past three months. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Particularly, we will be paying attention to Chong Kun Dang Pharmaceutical'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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

Check out our latest analysis for Chong Kun Dang Pharmaceutical

How To 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 Chong Kun Dang Pharmaceutical is:

21% = ₩191b ÷ ₩896b (Based on the trailing twelve months to September 2024).

The 'return' is the profit over the last twelve months. That means that for every ₩1 worth of shareholders' equity, the company generated ₩0.21 in profit.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.

Chong Kun Dang Pharmaceutical's Earnings Growth And 21% ROE

At first glance, Chong Kun Dang Pharmaceutical seems to have a decent ROE. On comparing with the average industry ROE of 9.0% the company's ROE looks pretty remarkable. This certainly adds some context to Chong Kun Dang Pharmaceutical's exceptional 28% net income growth seen over the past five years. We believe that there might also be other aspects that are positively influencing the company's earnings growth. 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.

Next, on comparing with the industry net income growth, we found that Chong Kun Dang Pharmaceutical's growth is quite high when compared to the industry average growth of 7.3% in the same period, which is great to see.

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. Is Chong Kun Dang Pharmaceutical fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Chong Kun Dang Pharmaceutical Using Its Retained Earnings Effectively?

Chong Kun Dang Pharmaceutical's three-year median payout ratio to shareholders is 6.4%, which is quite low. This implies that the company is retaining 94% of its profits. This suggests that the management is reinvesting most of the profits to grow the business as evidenced by the growth seen by the company.

Additionally, Chong Kun Dang 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 is expected to rise to 13% over the next three years. Accordingly, the expected increase in the payout ratio explains the expected decline in the company's ROE to 11%, over the same period.

Summary

On the whole, we feel that Chong Kun Dang 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, on studying current analyst estimates, we were concerned to see that while the company has grown its earnings in the past, analysts expect its earnings to shrink in the future. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts 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.