Is Gravity Co., Ltd.'s (NASDAQ:GRVY) Latest Stock Performance A Reflection Of Its Financial Health?

Simply Wall St · 10/18 11:04

Gravity (NASDAQ:GRVY) has had a great run on the share market with its stock up by a significant 16% over the last week. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. In this article, we decided to focus on Gravity's ROE.

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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for Gravity

How Is ROE Calculated?

The formula for return on equity is:

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

So, based on the above formula, the ROE for Gravity is:

18% = ₩90b ÷ ₩509b (Based on the trailing twelve months to June 2024).

The 'return' is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each $1 of shareholders' capital it has, the company made $0.18 in profit.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

Gravity's Earnings Growth And 18% ROE

To begin with, Gravity seems to have a respectable ROE. Further, the company's ROE compares quite favorably to the industry average of 12%. Probably as a result of this, Gravity was able to see an impressive net income growth of 23% over the last five years. We reckon that there could also be other factors at play here. For instance, the company has a low payout ratio or is being managed efficiently.

As a next step, we compared Gravity's net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 22% in the same period.

past-earnings-growth
NasdaqGM:GRVY Past Earnings Growth October 18th 2024

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). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about Gravity's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Gravity Efficiently Re-investing Its Profits?

Gravity doesn't pay any regular dividends to its shareholders, meaning that the company has been reinvesting all of its profits into the business. This is likely what's driving the high earnings growth number discussed above.

Summary

On the whole, we feel that Gravity's performance has been quite good. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth.