Neo Technical System Co., Ltd. (KOSDAQ:085910) Is Up But Financials Look Inconsistent: Which Way Is The Stock Headed?

Most readers would already know that Neo Technical System's (KOSDAQ:085910) stock increased by 3.1% over the past three months. However, we decided to study the company's mixed-bag of fundamentals to assess what this could mean for future share prices, as stock prices tend to be aligned with a company's long-term financial performance. In this article, we decided to focus on Neo Technical System's ROE.

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.

View our latest analysis for Neo Technical System

How To Calculate Return On Equity?

Return on equity can be calculated by using the formula:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Neo Technical System is:

2.7% = ₩1.1b ÷ ₩42b (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 ₩0.03 in profit.

What Has ROE Got To Do With 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.

Neo Technical System's Earnings Growth And 2.7% ROE

It is hard to argue that Neo Technical System's ROE is much good in and of itself. Not just that, even compared to the industry average of 4.9%, the company's ROE is entirely unremarkable. In spite of this, Neo Technical System was able to grow its net income considerably, at a rate of 41% in the last five years. We believe that there might be other aspects that are positively influencing the company's earnings growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

We then compared Neo Technical System's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 11% 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. If you're wondering about Neo Technical System's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Neo Technical System Efficiently Re-investing Its Profits?

Neo Technical System has very a high three-year median payout ratio of 117% suggesting that the company's shareholders are getting paid from more than just the company's earnings. However, this hasn't hampered its ability to grow as we saw earlier. With that said, it could be worth keeping an eye on the high payout ratio as that's a huge risk. To know the 5 risks we have identified for Neo Technical System visit our risks dashboard for free.

Besides, Neo Technical System has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders.

Conclusion

On the whole, we feel that the performance shown by Neo Technical System can be open to many interpretations. While the company has posted impressive earnings growth, its poor ROE and low earnings retention makes us doubtful if that growth could continue, if by any chance the business is faced with any sort of risk. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. To gain further insights into Neo Technical System'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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