Can Dong-A Hwa Sung Co.,Ltd. (KOSDAQ:041930) Performance Keep Up Given Its Mixed Bag Of Fundamentals?

Most readers would already know that Dong-A Hwa SungLtd's (KOSDAQ:041930) stock increased by 4.5% over the past month. However, the company's financials look a bit inconsistent and market outcomes are ultimately driven by long-term fundamentals, meaning that the stock could head in either direction. In this article, we decided to focus on Dong-A Hwa SungLtd's ROE.

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. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

See our latest analysis for Dong-A Hwa SungLtd

How Do You Calculate Return On Equity?

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 Dong-A Hwa SungLtd is:

3.6% = ₩4.0b ÷ ₩111b (Based on the trailing twelve months to September 2020).

The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every ₩1 worth of equity, the company was able to earn ₩0.04 in profit.

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. 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.

Dong-A Hwa SungLtd's Earnings Growth And 3.6% ROE

As you can see, Dong-A Hwa SungLtd's ROE looks pretty weak. An industry comparison shows that the company's ROE is not much different from the industry average of 3.4% either. Therefore, it might not be wrong to say that the five year net income decline of 7.0% seen by Dong-A Hwa SungLtd was possibly a result of the disappointing ROE.

We then compared Dong-A Hwa SungLtd's performance with the industry and found that the company has shrunk its earnings at a slower rate than the industry earnings which has seen its earnings shrink by 17% in the same period. This does appease the negative sentiment around the company to a certain extent.

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. One 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 prospects. So, you may want to check if Dong-A Hwa SungLtd is trading on a high P/E or a low P/E, relative to its industry.

Is Dong-A Hwa SungLtd Making Efficient Use Of Its Profits?

Dong-A Hwa SungLtd's low three-year median payout ratio of 12% (or a retention ratio of 88%) over the last three years should mean that the company is retaining most of its earnings to fuel its growth but the company's earnings have actually shrunk. This typically shouldn't be the case when a company is retaining most of its earnings. So there could be some other explanations in that regard. For example, the company's business may be deteriorating.

Additionally, Dong-A Hwa SungLtd 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

In total, we're a bit ambivalent about Dong-A Hwa SungLtd's performance. While the company does have a high rate of profit retention, its low rate of return is probably hampering its earnings growth. Wrapping up, we would proceed with caution with this company and one way of doing that would be to look at the risk profile of the business. You can see the 3 risks we have identified for Dong-A Hwa SungLtd by visiting our risks dashboard for free on our platform here.

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This article by Simply Wall St is general in nature. 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.
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