COSMOS Pharmaceutical Corporation (TSE:3349) Stock's Been Sliding But Fundamentals Look Decent: Will The Market Correct The Share Price In The Future?

With its stock down 6.7% over the past three months, it is easy to disregard COSMOS Pharmaceutical (TSE:3349). However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. Specifically, we decided to study COSMOS Pharmaceutical'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. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

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How Do You Calculate Return On Equity?

Return on equity 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 COSMOS Pharmaceutical is:

12% = JP¥31b ÷ JP¥263b (Based on the trailing twelve months to August 2025).

The 'return' is the yearly profit. Another way to think of that is that for every ¥1 worth of equity, the company was able to earn ¥0.12 in profit.

View our latest analysis for COSMOS Pharmaceutical

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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. 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.

COSMOS Pharmaceutical's Earnings Growth And 12% ROE

To start with, COSMOS Pharmaceutical's ROE looks acceptable. Further, the company's ROE compares quite favorably to the industry average of 8.5%. However, for some reason, the higher returns aren't reflected in COSMOS Pharmaceutical's meagre five year net income growth average of 2.8%. That's a bit unexpected from a company which has such a high rate of return. A few likely reasons why this could happen is that the company could have a high payout ratio or the business has allocated capital poorly, for instance.

As a next step, we compared COSMOS Pharmaceutical's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 9.9% in the same period.

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. Is COSMOS Pharmaceutical fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is COSMOS Pharmaceutical Efficiently Re-investing Its Profits?

A low three-year median payout ratio of 18% (implying that the company retains the remaining 82% of its income) suggests that COSMOS Pharmaceutical is retaining most of its profits. However, the low earnings growth number doesn't reflect this fact. So there could be some other explanation in that regard. For instance, the company's business may be deteriorating.

Additionally, COSMOS Pharmaceutical has paid dividends over a period of at least ten years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth.

Conclusion

Overall, we feel that COSMOS Pharmaceutical certainly does have some positive factors to consider. Yet, the low earnings growth is a bit concerning, especially given that the company has a high rate of return and is reinvesting ma huge portion of its profits. By the looks of it, there could be some other factors, not necessarily in control of the business, that's preventing growth. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.