Is ILJIN Holdings Co., Ltd.'s (KRX:015860) Recent Stock Performance Influenced By Its Fundamentals In Any Way?

ILJIN Holdings (KRX:015860) has had a great run on the share market with its stock up by a significant 13% over the last three months. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. In this article, we decided to focus on ILJIN Holdings' ROE.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for ILJIN Holdings

How To 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 ILJIN Holdings is:

3.2% = ₩17b ÷ ₩526b (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 ₩0.03.

Why Is ROE Important For 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. 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.

ILJIN Holdings' Earnings Growth And 3.2% ROE

As you can see, ILJIN Holdings' ROE looks pretty weak. Even compared to the average industry ROE of 5.7%, the company's ROE is quite dismal. In spite of this, ILJIN Holdings was able to grow its net income considerably, at a rate of 24% in the last five years. We reckon that there could be other factors at play here. For instance, the company has a low payout ratio or is being managed efficiently.

We then compared ILJIN Holdings' net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 3.6% in the same period.

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about ILJIN Holdings''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is ILJIN Holdings Efficiently Re-investing Its Profits?

ILJIN Holdings' three-year median payout ratio is a pretty moderate 38%, meaning the company retains 62% of its income. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like ILJIN Holdings is reinvesting its earnings efficiently.

Besides, ILJIN Holdings has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders.

Summary

In total, it does look like ILJIN Holdings has some positive aspects to its business. Despite its low rate of return, the fact that the company reinvests a very high portion of its profits into its business, no doubt contributed to its high earnings growth. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. Our risks dashboard would have the 2 risks we have identified for ILJIN Holdings.

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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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