Nam Hwa Construction Co.,Ltd's (KOSDAQ:091590) Stock is Soaring But Financials Seem Inconsistent: Will The Uptrend Continue?

Nam Hwa ConstructionLtd (KOSDAQ:091590) has had a great run on the share market with its stock up by a significant 15% over the last month. But the company's key financial indicators appear to be differing across the board and that makes us question whether or not the company's current share price momentum can be maintained. Specifically, we decided to study Nam Hwa ConstructionLtd's ROE in this article.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Put another way, it reveals the company's success at turning shareholder investments into profits.

View our latest analysis for Nam Hwa ConstructionLtd

How Do You 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 Nam Hwa ConstructionLtd is:

4.0% = ₩5.7b ÷ ₩143b (Based on the trailing twelve months to September 2020).

The 'return' is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each ₩1 of shareholders' capital it has, the company made ₩0.04 in profit.

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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. 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.

Nam Hwa ConstructionLtd's Earnings Growth And 4.0% ROE

It is quite clear that Nam Hwa ConstructionLtd's ROE is rather low. Even when compared to the industry average of 8.8%, the ROE figure is pretty disappointing. Therefore, Nam Hwa ConstructionLtd'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 Nam Hwa ConstructionLtd's reported growth was lower than the industry growth of 17% 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. 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. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Nam Hwa ConstructionLtd is trading on a high P/E or a low P/E, relative to its industry.

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 might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.

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.

Conclusion

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. Up till now, we've only made a short study of the company's growth data. To gain further insights into Nam Hwa ConstructionLtd's past profit growth, check out this visualization of past earnings, revenue and cash flows.

When trading Nam Hwa ConstructionLtd or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.