Tuksu Engineering & Construction,Ltd.'s (KOSDAQ:026150) Stock Has Shown A Decent Performance: Have Financials A Role To Play?

Tuksu Engineering & ConstructionLtd's (KOSDAQ:026150) stock is up by 9.1% over the past three months. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to investigate if the company's decent financials had a hand to play in the recent price move. Particularly, we will be paying attention to Tuksu Engineering & ConstructionLtd's ROE today.

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

Check out our latest analysis for Tuksu Engineering & ConstructionLtd

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 Tuksu Engineering & ConstructionLtd is:

1.6% = ₩1.4b ÷ ₩90b (Based on the trailing twelve months to September 2020).

The 'return' is the profit 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 ₩0.02 in profit.

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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 Tuksu Engineering & ConstructionLtd's Earnings Growth And 1.6% ROE

As you can see, Tuksu Engineering & ConstructionLtd's ROE looks pretty weak. Even compared to the average industry ROE of 9.6%, the company's ROE is quite dismal. In spite of this, Tuksu Engineering & ConstructionLtd was able to grow its net income considerably, at a rate of 67% in the last five years. We reckon that there could be other factors at play here. Such as - high earnings retention or an efficient management in place.

As a next step, we compared Tuksu Engineering & ConstructionLtd's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 18%.

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Tuksu Engineering & ConstructionLtd's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Tuksu Engineering & ConstructionLtd Using Its Retained Earnings Effectively?

Given that Tuksu Engineering & ConstructionLtd doesn't pay any dividend to its shareholders, we infer that the company has been reinvesting all of its profits to grow its business.

Conclusion

On the whole, we do feel that Tuksu Engineering & ConstructionLtd has some positive attributes. With a high rate of reinvestment, albeit at a low ROE, the company has managed to see a considerable growth in its earnings. 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. You can see the 1 risk we have identified for Tuksu Engineering & ConstructionLtd 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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