Is Chong Kun Dang Pharmaceutical Corp.'s (KRX:185750) Latest Stock Performance A Reflection Of Its Financial Health?

Most readers would already be aware that Chong Kun Dang Pharmaceutical's (KRX:185750) stock increased significantly by 22% over the past three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. In this article, we decided to focus on Chong Kun Dang Pharmaceutical's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for Chong Kun Dang Pharmaceutical

How Is ROE Calculated?

ROE 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:

25% = ₩204b ÷ ₩826b (Based on the trailing twelve months to March 2024).

The 'return' is the yearly profit. So, this means that for every ₩1 of its shareholder's investments, the company generates a profit of ₩0.25.

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. 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.

A Side By Side comparison of Chong Kun Dang Pharmaceutical's Earnings Growth And 25% ROE

Firstly, we acknowledge that Chong Kun Dang Pharmaceutical has a significantly high ROE. Second, a comparison with the average ROE reported by the industry of 8.0% also doesn't go unnoticed by us. As a result, Chong Kun Dang Pharmaceutical's exceptional 24% net income growth seen over the past five years, doesn't come as a surprise.

We then compared Chong Kun Dang 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 10% in the same 5-year period.

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). Doing so will help them establish if the stock's future looks promising or ominous. What is A185750 worth today? The intrinsic value infographic in our free research report helps visualize whether A185750 is currently mispriced by the market.

Is Chong Kun Dang Pharmaceutical Making Efficient Use Of Its Profits?

Chong Kun Dang Pharmaceutical has a really low three-year median payout ratio of 6.4%, meaning that it has the remaining 94% left over to reinvest into its business. So it looks like Chong Kun Dang Pharmaceutical is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Besides, Chong Kun Dang Pharmaceutical has been paying dividends over a period of five years. This shows that the company is committed to sharing profits with its shareholders. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to rise to 13% over the next three years. Consequently, the higher expected payout ratio explains the decline in the company's expected ROE (to 11%) over the same period.

Conclusion

Overall, we are quite pleased with Chong Kun Dang Pharmaceutical's performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. With that said, on studying the latest analyst forecasts, we found that while the company has seen growth in its past earnings, analysts expect its future earnings to shrink. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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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.