Kuk Young G&M (KOSDAQ:006050) has had a great run on the stock market, with its stock up a remarkable 24% over the past month. However, the company’s key financial indicators seem to be mixed across the board, and that makes us doubt whether the company’s current price momentum can be sustained. Specifically, we decided to examine Kuk Young G&M’s return on equity in this article.

Return on equity or ROE is an important factor for a shareholder to consider as it tells them how effectively their capital is being reinvested. In other words, it is a profitability ratio that measures the return on the capital provided by the company’s shareholders.

Check out our latest analysis for Kuk Young G&M

How do you calculate return on equity?

Return on equity can be calculated using the following formula:

Return on equity = Net profit (from continuing operations) ÷ Equity

Based on the above formula, the ROE for Kuk Young G&M is:

1.2% = ₩589 million ÷ ₩48 billion (based on the trailing twelve months to March 2024).

The “return” is the amount earned after taxes over the last twelve months. This means that for every ₩1 invested by its shareholders, the company earned ₩0.01 in profit.

What is the relationship between ROE and earnings growth?

So far, we have learned that return on equity (ROE) measures how efficiently a company generates its profits. Depending on how much of those profits the company reinvests or “retains” and how effectively it does so, we can assess a company’s earnings growth potential. Generally speaking, all other things being equal, companies with high return on equity and earnings retention will have a higher growth rate than companies that do not have these characteristics.

Kuk Young G&M’s profit growth and return on equity of 1.2%

It is hard to deny that Kuk Young G&M’s return on equity is very good in and of itself. And not only that, even compared to the industry average of 5.5%, the company’s return on equity is completely unremarkable. Kuk Young G&M’s low net income growth of 3.3% over the past five years could therefore probably be attributed to the lower return on equity.

Next, we compared Kuk Young G&M’s net profit growth with that of the industry and were disappointed to find that the company’s growth was below the average industry growth of 14% over the same period.

Earnings growth is an important factor in stock valuation. It is important for an investor to know whether the market has priced in the company’s expected earnings growth (or decline). This will help them gauge whether the stock is heading for clear waters or drifting into murky waters. A 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 should check whether Kuk Young G&M is trading at a high or low P/E relative to the industry.

Does Kuk Young G&M use its profits efficiently?

Kuk Young G&M does not pay regular dividends, which means that all profits may be reinvested in the company. However, this does not explain the company’s low earnings growth. So there could be other factors at play that may be hindering growth. For example, the company has been facing some headwinds.

Diploma

Overall, we are a bit ambivalent about Kuk Young G&M’s performance. While the company has a high reinvestment rate, the low return on equity means that all this reinvestment is not benefiting investors and is also having a negative impact on earnings growth. In summary, we would proceed with caution with this company and one way to do that would be to look at the company’s risk profile. To learn about the 3 risks we have identified for Kuk Young G&M, visit our risk dashboard for free.

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