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Korea Aerospace Industries, Ltd.'s (KRX:047810) Stock Has Seen Strong Momentum: Does That Call For Deeper Study Of Its Financial Prospects?

Simply Wall St · 04/18 21:18

Korea Aerospace Industries (KRX:047810) has had a great run on the share market with its stock up by a significant 49% over the last three months. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. In this article, we decided to focus on Korea Aerospace Industries' ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

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How To Calculate Return On Equity?

The formula for ROE is:

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

So, based on the above formula, the ROE for Korea Aerospace Industries is:

9.9% = ₩171b ÷ ₩1.7t (Based on the trailing twelve months to December 2024).

The 'return' refers to a company's earnings over the last year. That means that for every ₩1 worth of shareholders' equity, the company generated ₩0.10 in profit.

View our latest analysis for Korea Aerospace Industries

What Has ROE Got To Do With 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. 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 Korea Aerospace Industries' Earnings Growth And 9.9% ROE

On the face of it, Korea Aerospace Industries' ROE is not much to talk about. Next, when compared to the average industry ROE of 15%, the company's ROE leaves us feeling even less enthusiastic. Korea Aerospace Industries was still able to see a decent net income growth of 17% over the past five years. We reckon that there could be other factors at play here. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

As a next step, we compared Korea Aerospace Industries' net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 33% in the same period.

past-earnings-growth
KOSE:A047810 Past Earnings Growth April 18th 2025

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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Korea Aerospace Industries fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Korea Aerospace Industries Making Efficient Use Of Its Profits?

Korea Aerospace Industries' three-year median payout ratio to shareholders is 22% (implying that it retains 78% of its income), which is on the lower side, so it seems like the management is reinvesting profits heavily to grow its business.

Additionally, Korea Aerospace Industries has paid dividends over a period of six years which means that the company is pretty serious about sharing its profits with shareholders. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to drop to 16% over the next three years. As a result, the expected drop in Korea Aerospace Industries' payout ratio explains the anticipated rise in the company's future ROE to 21%, over the same period.

Conclusion

On the whole, we do feel that Korea Aerospace Industries has some positive attributes. Namely, its respectable earnings growth, which it achieved due to it retaining most of its profits. However, given the low ROE, investors may not be benefitting from all that reinvestment after all. 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.