Koh Young Technology Inc.'s (KOSDAQ:098460) Stock Is Rallying But Financials Look Ambiguous: Will The Momentum Continue?

Koh Young Technology (KOSDAQ:098460) has had a great run on the share market with its stock up by a significant 23% over the last three months. But the company's key financial indicators appear to be differing across the board and that makes us question whether or not the company's current share price momentum can be maintained. Specifically, we decided to study Koh Young Technology's ROE in this article.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View our latest analysis for Koh Young Technology

How Is ROE Calculated?

The formula for ROE is:

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

So, based on the above formula, the ROE for Koh Young Technology is:

4.8% = ₩12b ÷ ₩249b (Based on the trailing twelve months to September 2020).

The 'return' is the amount earned after tax over the last twelve months. Another way to think of that is that for every ₩1 worth of equity, the company was able to earn ₩0.05 in profit.

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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.

A Side By Side comparison of Koh Young Technology's Earnings Growth And 4.8% ROE

It is quite clear that Koh Young Technology's ROE is rather low. Even compared to the average industry ROE of 8.5%, the company's ROE is quite dismal. Accordingly, Koh Young Technology's low net income growth of 3.7% over the past five years can possibly be explained by the low ROE amongst other factors.

As a next step, we compared Koh Young Technology's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 12% in the same period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. Is Koh Young Technology fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Koh Young Technology Using Its Retained Earnings Effectively?

A low three-year median payout ratio of 23% (implying that the company retains the remaining 77% of its income) suggests that Koh Young Technology is retaining most of its profits. However, the low earnings growth number doesn't reflect this as high growth usually follows high profit retention. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.

Moreover, Koh Young Technology has been paying dividends for four years, which is a considerable amount of time, suggesting that management must have perceived that the shareholders prefer dividends over earnings growth. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to rise to 27% over the next three years. Still, forecasts suggest that Koh Young Technology's future ROE will rise to 16% even though the the company's payout ratio is expected to rise. We presume that there could some other characteristics of the business that could be driving the anticipated growth in the company's ROE.

Summary

In total, we're a bit ambivalent about Koh Young Technology's performance. While the company does have a high rate of profit retention, its low rate of return is probably hampering its earnings growth. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. 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. 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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