Stock Analysis

KCTC Co. Ltd's (KRX:009070) Financials Are Too Obscure To Link With Current Share Price Momentum: What's In Store For the Stock?

KOSE:A009070
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KCTC's (KRX:009070) stock is up by a considerable 86% over the past month. 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 KCTC's ROE in this article.

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. Put another way, it reveals the company's success at turning shareholder investments into profits.

See our latest analysis for KCTC

How To Calculate Return On Equity?

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 KCTC is:

4.5% = ₩9.2b ÷ ₩203b (Based on the trailing twelve months to September 2020).

The 'return' is the income the business earned over the last year. So, this means that for every â‚©1 of its shareholder's investments, the company generates a profit of â‚©0.05.

Why Is ROE Important For 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. 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.

KCTC's Earnings Growth And 4.5% ROE

It is quite clear that KCTC's ROE is rather low. Further, we noted that the company's ROE is similar to the industry average of 4.5%. Therefore, it might not be wrong to say that the five year net income decline of 7.0% seen by KCTC was possibly a result of the disappointing ROE.

Next, on comparing with the industry net income growth, we found that KCTC's earnings seems to be shrinking at a similar rate as the industry which shrunk at a rate of a rate of 7.0% in the same period.

past-earnings-growth
KOSE:A009070 Past Earnings Growth March 2nd 2021

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. 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 KCTC is trading on a high P/E or a low P/E, relative to its industry.

Is KCTC Efficiently Re-investing Its Profits?

KCTC's low three-year median payout ratio of 19% (implying that it retains the remaining 81% of its profits) comes as a surprise when you pair it with the shrinking earnings. This typically shouldn't be the case when a company is retaining most of its earnings. So there could be some other explanations in that regard. For example, the company's business may be deteriorating.

Moreover, KCTC has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth.

Conclusion

On the whole, we feel that the performance shown by KCTC can be open to many interpretations. While the company does have a high rate of reinvestment, the low ROE means that all that reinvestment is not reaping any benefit to its investors, and moreover, its having a negative impact on the earnings growth. Wrapping up, we would proceed with caution with this company and one way of doing that would be to look at the risk profile of the business. Our risks dashboard would have the 3 risks we have identified for KCTC.

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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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