K&S Corporation Limited (ASX:KSC) stock rallies but financials look ambiguous: Will the momentum continue?

Most readers already know that shares of K&S (ASX:KSC) are up a significant 16% in the past month. However, we wonder if the company’s inconsistent financial statements would negatively impact the current share price dynamics. In this article, we decided to focus on K&S ROE.

Return on Equity or ROE is a test of how effectively a company increases its value and manages investors’ money. In simpler terms, it measures a company’s profitability relative to equity.

Check out our latest analysis for K&S

How to calculate return on equity?

Return on equity can be calculated using the formula:

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

So, based on the formula above, the ROE for K&S is:

5.7% = AU$17 million ÷ AU$307 million (based on trailing 12 months to June 2022).

The “yield” is the amount earned after tax over the last twelve months. Another way to think about this is that for every 1 Australian dollar of equity, the company was able to make a profit of 0.06 Australian dollars.

Why is ROE important for earnings growth?

So far we have learned that ROE is a measure of a company’s profitability. Depending on how much of those earnings the company reinvests or “keeps”, and how efficiently it does so, we are then able to assess a company’s earnings growth potential. Generally speaking, all things being equal, companies with high return on equity and earnings retention have a higher growth rate than companies that do not share these attributes.

A side-by-side comparison of K&S earnings growth and ROE of 5.7%

At first glance, K&S ROE doesn’t have much to say. Then, compared to the industry average ROE of 20%, the company’s ROE leaves us even less excited. K&S was still able to see a decent net income growth of 11% over the past five years. Thus, the company’s earnings growth could likely have been caused by other variables. For example, the business has a low payout ratio or is efficiently managed.

The story continues

As a next step, we benchmarked K&S net income growth with the industry and were disappointed to see that the company’s growth is below the industry average growth of 19% over the same period.

Earnings growth is an important metric to consider when evaluating a stock. It is important for an investor to know whether the market has priced in the expected growth (or decline) in the company’s earnings. By doing so, they will get an idea if the stock is headed for clear blue waters or if swampy waters are waiting. 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 outlook. Thus, you might want to check whether K&S is trading on a high P/E or a low P/E, relative to its industry.

Does K&S use its profits efficiently?

The high three-year median payout rate of 57% (or a retention rate of 43%) for K&S suggests that the company’s growth hasn’t really been hampered despite returning most of its income to its shareholders.

Additionally, K&S is committed to continuing to share its profits with shareholders, which we infer from its long history of paying dividends for at least ten years.

Conclusion

Overall, we believe that the performance shown by K&S can be open to many interpretations. While its earnings growth is undoubtedly quite respectable, low earnings retention could mean that the company’s earnings growth could have been higher, had it paid for it by reinvesting more of its earnings. An improvement in its ROE could also contribute to its future earnings growth. So far, we have only had a brief discussion of corporate earnings growth. You can do your own research on K&S and see how it has performed in the past by watching this FREE detailed graph past profits, revenue and cash flow.

Feedback on this article? Concerned about content? Get in touch with us directly. You can also email the editorial team (at) Simplywallst.com.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

Join a Paid User Research Session
You will receive a $30 Amazon Gift Card for 1 hour of your time while helping us create better investment tools for individual investors like you. register here