Nam Hwa ConstructionLtd's (KOSDAQ:091590) stock is up by a considerable 10% over the past month. However, we decided to pay attention to the company's fundamentals which don't appear to give a clear sign about the company's financial health. Specifically, we decided to study Nam Hwa ConstructionLtd'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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
How Is ROE Calculated?
ROE 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 Nam Hwa ConstructionLtd is:
4.0% = ₩5.7b ÷ ₩143b (Based on the trailing twelve months to September 2020).
The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every ₩1 worth of equity, the company was able to earn ₩0.04 in profit.
What Is The Relationship Between ROE And 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. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.
Nam Hwa ConstructionLtd's Earnings Growth And 4.0% ROE
As you can see, Nam Hwa ConstructionLtd's ROE looks pretty weak. Not just that, even compared to the industry average of 9.6%, the company's ROE is entirely unremarkable. As a result, Nam Hwa ConstructionLtd's flat earnings over the past five years doesn't come as a surprise given its lower ROE.
Next, on comparing with the industry net income growth, we found that Nam Hwa ConstructionLtd's reported growth was lower than the industry growth of 18% in the same period, which is not something we like to see.
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). This then helps them determine if the stock is placed for a bright or bleak future. Is Nam Hwa ConstructionLtd fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is Nam Hwa ConstructionLtd Making Efficient Use Of Its Profits?
In spite of a normal three-year median payout ratio of 30% (or a retention ratio of 70%), Nam Hwa ConstructionLtd hasn't seen much growth in its earnings. So there could be some other explanation in that regard. For instance, the company's business may be deteriorating.
Only recently, Nam Hwa ConstructionLtd started paying a dividend. This means that the management might have concluded that its shareholders prefer dividends over earnings growth.
In total, we're a bit ambivalent about Nam Hwa ConstructionLtd's performance. While the company does have a high rate of profit retention, its low rate of return is probably hampering its earnings growth. 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 Nam Hwa ConstructionLtd's past profit growth, check out this visualization of past earnings, revenue and cash flows.
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