Is S-Fuelcell co., Ltd.'s (KOSDAQ:288620) Recent Price Movement Underpinned By Its Weak Fundamentals?

It is hard to get excited after looking at S-Fuelcell's (KOSDAQ:288620) recent performance, when its stock has declined 10% over the past month. It is possible that the markets have ignored the company's differing financials and decided to lean-in to the negative sentiment. Stock prices are usually driven by a company’s financial performance over the long term, and therefore we decided to pay more attention to the company's financial performance. Particularly, we will be paying attention to S-Fuelcell's ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out our latest analysis for S-Fuelcell

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 S-Fuelcell is:

5.4% = ₩2.3b ÷ ₩41b (Based on the trailing twelve months to September 2020).

The 'return' is the income the business earned over the last year. So, this means that for every ₩1 of its shareholder's investments, the company generates a profit of ₩0.05.

What Is The Relationship Between ROE And Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.

S-Fuelcell's Earnings Growth And 5.4% ROE

It is hard to argue that S-Fuelcell's ROE is much good in and of itself. An industry comparison shows that the company's ROE is not much different from the industry average of 5.6% either. Therefore, it might not be wrong to say that the five year net income decline of 14% seen by S-Fuelcell was possibly a result of the disappointing ROE.

However, when we compared S-Fuelcell's growth with the industry we found that while the company's earnings have been shrinking, the industry has seen an earnings growth of 3.6% in the same period. This is quite worrisome.

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. 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 S-Fuelcell's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is S-Fuelcell Efficiently Re-investing Its Profits?

Summary

In total, we're a bit ambivalent about S-Fuelcell's performance. While the company does have a high rate of profit retention, its low rate of return is probably hampering its earnings growth. Wrapping up, we would proceed with caution with this company and one way of doing that would be to look at the risk profile of the business. To know the 5 risks we have identified for S-Fuelcell visit our risks dashboard for free.

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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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