Is Hwashin Precision Engineering Co., Ltd.'s (KOSDAQ:126640) Recent Stock Performance Influenced By Its Fundamentals In Any Way?

Hwashin Precision Engineering (KOSDAQ:126640) has had a great run on the share market with its stock up by a significant 56% over the last three months. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. Specifically, we decided to study Hwashin Precision Engineering's ROE in this article.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View our latest analysis for Hwashin Precision Engineering

How Is ROE Calculated?

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 Hwashin Precision Engineering is:

4.6% = ₩3.8b ÷ ₩83b (Based on the trailing twelve months to September 2020).

The 'return' is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each ₩1 of shareholders' capital it has, the company made ₩0.05 in profit.

Why Is ROE Important For 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. 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.

Hwashin Precision Engineering's Earnings Growth And 4.6% ROE

It is hard to argue that Hwashin Precision Engineering's ROE is much good in and of itself. However, when compared to the industry average of 3.6%, we do feel there's definitely more to the company. But seeing Hwashin Precision Engineering's five year net income decline of 4.6% over the past five years, we might rethink that. Bear in mind, the company does have a low ROE. It is just that the industry ROE is lower. Therefore, the decline in earnings could also be the result of this.

As a next step, we compared Hwashin Precision Engineering's performance with the industry and discovered the industry has shrunk at a rate of 14% in the same period meaning that the company has been shrinking its earnings at a rate lower than the industry. This does appease the negative sentiment around the company to a certain extent.

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. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Hwashin Precision Engineering's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Hwashin Precision Engineering Making Efficient Use Of Its Profits?

Conclusion

In total, it does look like Hwashin Precision Engineering has some positive aspects to its business. However, while the company does have a decent ROE and a high profit retention, its earnings growth number is quite disappointing. This suggests that there might be some external threat to the business, that's hampering growth. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. To know the 3 risks we have identified for Hwashin Precision Engineering visit our risks dashboard for free.

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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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