HYUNDAI WIA Corporation's (KRX:011210) Financials Are Too Obscure To Link With Current Share Price Momentum: What's In Store For the Stock?

HYUNDAI WIA (KRX:011210) has had a great run on the share market with its stock up by a significant 151% over the last three months. However, we wonder if the company's inconsistent financials would have any adverse impact on the current share price momentum. In this article, we decided to focus on HYUNDAI WIA's ROE.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Put another way, it reveals the company's success at turning shareholder investments into profits.

See our latest analysis for HYUNDAI WIA

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 HYUNDAI WIA is:

3.1% = ₩114b ÷ ₩3.6t (Based on the trailing twelve months to September 2020).

The 'return' is the yearly profit. One way to conceptualize this is that for each ₩1 of shareholders' capital it has, the company made ₩0.03 in profit.

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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.

A Side By Side comparison of HYUNDAI WIA's Earnings Growth And 3.1% ROE

As you can see, HYUNDAI WIA's ROE looks pretty weak. A comparison with the industry shows that the company's ROE is pretty similar to the average industry ROE of 3.4%. Therefore, it might not be wrong to say that the five year net income decline of 43% seen by HYUNDAI WIA was possibly a result of the disappointing ROE.

As a next step, we compared HYUNDAI WIA's performance with the industry and found thatHYUNDAI WIA's performance is depressing even when compared with the industry, which has shrunk its earnings at a rate of 17% in the same period, which is a slower than the company.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. 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 HYUNDAI WIA is trading on a high P/E or a low P/E, relative to its industry.

Is HYUNDAI WIA Efficiently Re-investing Its Profits?

HYUNDAI WIA's low three-year median payout ratio of 15% (or a retention ratio of 85%) 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 might be other factors at play here which could potentially be hampering growth. For instance, the business has faced some headwinds.

Only recently, HYUNDAI WIA stated paying a dividend. This likely means that the management might have concluded that its shareholders have a strong preference for dividends. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 15%. Still, forecasts suggest that HYUNDAI WIA's future ROE will rise to 4.3% even though the the company's payout ratio is not expected to change by much.

Summary

In total, we're a bit ambivalent about HYUNDAI WIA's performance. Even though it appears to be retaining most of its profits, given the low ROE, investors may not be benefitting from all that reinvestment after all. The low earnings growth suggests our theory correct. Having said that, looking at current analyst estimates, we found that the company's earnings growth rate is expected to see a huge improvement. 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. 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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