Hyundai Mobis Co.,Ltd's (KRX:012330) Stock Has Seen Strong Momentum: Does That Call For Deeper Study Of Its Financial Prospects?

Most readers would already be aware that Hyundai MobisLtd's (KRX:012330) stock increased significantly by 33% over the past three months. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. Specifically, we decided to study Hyundai MobisLtd'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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

View our latest analysis for Hyundai MobisLtd

How To 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 MobisLtd is:

4.7% = ₩1.6t ÷ ₩33t (Based on the trailing twelve months to September 2020).

The 'return' is the profit over the last twelve months. That means that for every ₩1 worth of shareholders' equity, the company generated ₩0.05 in profit.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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 all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

A Side By Side comparison of Hyundai MobisLtd's Earnings Growth And 4.7% ROE

It is quite clear that Hyundai MobisLtd's ROE is rather low. However, the fact that it is higher than the industry average of 3.4% makes us a bit more interested. Or may be not, given Hyundai MobisLtd's five year net income decline of 14% in the past five years. Remember, the company's ROE is quite low to begin with, just that it is higher than the industry average. Therefore, the decline in earnings could also be the result of this.

With the industry earnings declining at a rate of 17% in the same period, we deduce that both the company and the industry are shrinking at the same rate.

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. If you're wondering about Hyundai MobisLtd's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Hyundai MobisLtd Using Its Retained Earnings Effectively?

When we piece together Hyundai MobisLtd's low three-year median payout ratio of 19% (where it is retaining 81% of its profits), calculated for the last three-year period, we are puzzled by the lack of growth. 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, Hyundai MobisLtd 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. Our latest analyst data shows that the future payout ratio of the company is expected to drop to 14% over the next three years. As a result, the expected drop in Hyundai MobisLtd's payout ratio explains the anticipated rise in the company's future ROE to 8.3%, over the same period.

Conclusion

In total, it does look like Hyundai MobisLtd 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. With that said, we studied the latest analyst forecasts and found that while the company has shrunk its earnings in the past, analysts expect its earnings to grow in the future. 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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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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