Declining Stock and Solid Fundamentals: Is The Market Wrong About Coupang, Inc. (NYSE:CPNG)?

Coupang, Inc. Class A +1.88% Pre

Coupang, Inc. Class A

CPNG

21.65

21.29

+1.88%

-1.66% Pre

It is hard to get excited after looking at Coupang's (NYSE:CPNG) recent performance, when its stock has declined 3.7% over the past three months. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Particularly, we will be paying attention to Coupang's ROE today.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for Coupang

How Is ROE Calculated?

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 Coupang is:

15% = US$429m ÷ US$2.9b (Based on the trailing twelve months to September 2023).

The 'return' is the amount earned after tax over the last twelve months. Another way to think of that is that for every $1 worth of equity, the company was able to earn $0.15 in profit.

What Is The Relationship Between ROE And 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. 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.

Coupang's Earnings Growth And 15% ROE

To start with, Coupang's ROE looks acceptable. Even so, when compared with the average industry ROE of 19%, we aren't very excited. That being the case, the significant five-year 35% net income growth reported by Coupang comes as a pleasant surprise. We believe that there might be other aspects that are positively influencing the company's earnings growth. Such as - high earnings retention or an efficient management in place. However, not to forget, the company does have a decent ROE to begin with, just that it is lower than the industry average. So this also does lend some color to the high earnings growth seen by the company.

Next, on comparing with the industry net income growth, we found that Coupang's growth is quite high when compared to the industry average growth of 13% in the same period, which is great to see.

past-earnings-growth
NYSE:CPNG Past Earnings Growth December 29th 2023

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. What is CPNG worth today? The intrinsic value infographic in our free research report helps visualize whether CPNG is currently mispriced by the market.

Is Coupang Making Efficient Use Of Its Profits?

Coupang doesn't pay any dividend 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.

Conclusion

On the whole, we feel that Coupang's performance has been quite good. Particularly, we like that the company is reinvesting heavily into its business at a moderate rate of return. Unsurprisingly, this has led to an impressive earnings growth. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

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