Does Shinsung Delta Tech Co.,Ltd.'s (KOSDAQ:065350) Weak Fundamentals Mean That The Market Could Correct Its Share Price?

Most readers would already be aware that Shinsung Delta TechLtd's (KOSDAQ:065350) stock increased significantly by 97% over the past three months. However, we decided to pay close attention to its weak financials as we are doubtful that the current momentum will keep up, given the scenario. Particularly, we will be paying attention to Shinsung Delta TechLtd's ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

Check out our latest analysis for Shinsung Delta TechLtd

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 Shinsung Delta TechLtd is:

2.4% = ₩3.6b ÷ ₩148b (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?

So far, we've learned that ROE is a measure of a company's profitability. 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 Shinsung Delta TechLtd's Earnings Growth And 2.4% ROE

As you can see, Shinsung Delta TechLtd's ROE looks pretty weak. Even compared to the average industry ROE of 5.6%, the company's ROE is quite dismal. Therefore, Shinsung Delta TechLtd's flat earnings over the past five years can possibly be explained by the low ROE amongst other factors.

Next, on comparing with the industry net income growth, we found that the industry grew its earnings by3.6% in the same period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Shinsung Delta TechLtd fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Shinsung Delta TechLtd Efficiently Re-investing Its Profits?

The high three-year median payout ratio of 52% (meaning, the company retains only 48% of profits) for Shinsung Delta TechLtd suggests that the company's earnings growth was miniscule as a result of paying out a majority of its earnings.

Moreover, Shinsung Delta TechLtd has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth.

Summary

In total, we would have a hard think before deciding on any investment action concerning Shinsung Delta TechLtd. The company has seen a lack of earnings growth as a result of retaining very little profits and whatever little it does retain, is being reinvested at a very low rate of return. Up till now, we've only made a short study of the company's growth data. To gain further insights into Shinsung Delta TechLtd's past profit growth, check out this visualization of past earnings, revenue and cash flows.

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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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