Do Its Financials Have Any Role To Play In Driving LS ELECTRIC Co., Ltd.'s (KRX:010120) Stock Up Recently?

LS ELECTRIC's (KRX:010120) stock is up by a considerable 20% over the past three months. As most would know, fundamentals are what usually guide market price movements over the long-term, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. In this article, we decided to focus on LS ELECTRIC's ROE.

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 LS ELECTRIC

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 LS ELECTRIC is:

5.6% = ₩78b ÷ ₩1.4t (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 ₩0.06 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. 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. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

A Side By Side comparison of LS ELECTRIC's Earnings Growth And 5.6% ROE

It is quite clear that LS ELECTRIC's ROE is rather low. Further, we noted that the company's ROE is similar to the industry average of 5.6%. Therefore, the low net income growth of 3.2% seen by LS ELECTRIC over the past five years could probably be the result of it having a lower ROE.

We then performed a comparison between LS ELECTRIC's net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 3.6% in the same period.

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. 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 LS ELECTRIC is trading on a high P/E or a low P/E, relative to its industry.

Is LS ELECTRIC Using Its Retained Earnings Effectively?

Despite having a moderate three-year median payout ratio of 34% (implying that the company retains the remaining 66% of its income), LS ELECTRIC's earnings growth was quite low. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.

In addition, LS ELECTRIC has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 28%. Still, forecasts suggest that LS ELECTRIC's future ROE will rise to 9.0% even though the the company's payout ratio is not expected to change by much.

Summary

On the whole, we do feel that LS ELECTRIC has some positive attributes. That is, a decent growth in earnings backed by a high rate of reinvestment. However, we do feel that that earnings growth could have been higher if the business were to improve on the low ROE rate. Especially given how the company is reinvesting a huge chunk of its profits. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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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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