HD Korea Shipbuilding & Offshore Engineering Co., Ltd. (KRX:009540) Has Fared Decently But Fundamentals Look Uncertain: What Lies Ahead For The Stock?

HD Korea Shipbuilding & Offshore Engineering's (KRX:009540) stock up by 5.4% over the past three months. Given that the stock prices usually follow long-term business performance, we wonder if the company's mixed financials could have any adverse effect on its current price price movement Specifically, we decided to study HD Korea Shipbuilding & Offshore Engineering'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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for HD Korea Shipbuilding & Offshore Engineering

How Is ROE Calculated?

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 HD Korea Shipbuilding & Offshore Engineering is:

1.2% = ₩145b ÷ ₩12t (Based on the trailing twelve months to December 2023).

The 'return' is the yearly profit. That means that for every ₩1 worth of shareholders' equity, the company generated ₩0.01 in profit.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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.

A Side By Side comparison of HD Korea Shipbuilding & Offshore Engineering's Earnings Growth And 1.2% ROE

As you can see, HD Korea Shipbuilding & Offshore Engineering's ROE looks pretty weak. Even compared to the average industry ROE of 8.1%, the company's ROE is quite dismal. As a result, HD Korea Shipbuilding & Offshore Engineering'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 HD Korea Shipbuilding & Offshore Engineering's reported growth was lower than the industry growth of 18% over the last few years, which is not something we like to see.

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about HD Korea Shipbuilding & Offshore Engineering's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is HD Korea Shipbuilding & Offshore Engineering Efficiently Re-investing Its Profits?

HD Korea Shipbuilding & Offshore Engineering doesn't pay any regular dividends, which means that it is retaining all of its earnings. This makes us question why the company is retaining so much of its profits and still generating almost no growth? So there could be some other explanations in that regard. For instance, the company's business may be deteriorating.

Summary

In total, we're a bit ambivalent about HD Korea Shipbuilding & Offshore Engineering's performance. Even though it appears to be retaining most of its profits, given the low ROE, investors may not be benefitting from all that reinvestment after all. The low earnings growth suggests our theory correct. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.