Is Dong-Ah Geological Engineering Company Ltd.'s (KRX:028100) Recent Stock Performance Influenced By Its Fundamentals In Any Way?

Most readers would already be aware that Dong-Ah Geological Engineering's (KRX:028100) stock increased significantly by 14% over the past 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 Dong-Ah Geological Engineering's 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. Put another way, it reveals the company's success at turning shareholder investments into profits.

View our latest analysis for Dong-Ah Geological Engineering

How Is ROE Calculated?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Dong-Ah Geological Engineering is:

4.2% = ₩8.4b ÷ ₩198b (Based on the trailing twelve months to September 2020).

The 'return' is the yearly profit. Another way to think of that is that for every ₩1 worth of equity, the company was able to earn ₩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. 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.

Dong-Ah Geological Engineering's Earnings Growth And 4.2% ROE

It is quite clear that Dong-Ah Geological Engineering's ROE is rather low. Not just that, even compared to the industry average of 9.6%, the company's ROE is entirely unremarkable. However, the moderate 16% net income growth seen by Dong-Ah Geological Engineering over the past five years is definitely a positive. 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.

Next, on comparing Dong-Ah Geological Engineering's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 18% in the same period.

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Dong-Ah Geological Engineering fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Dong-Ah Geological Engineering Making Efficient Use Of Its Profits?

In Dong-Ah Geological Engineering's case, its respectable earnings growth can probably be explained by its low three-year median payout ratio of 13% (or a retention ratio of 87%), which suggests that the company is investing most of its profits to grow its business.

Besides, Dong-Ah Geological Engineering 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 Dong-Ah Geological Engineering has some positive aspects to its business. Even in spite of the low rate of return, the company has posted impressive earnings growth as a result of reinvesting heavily into its business. 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 will have the 1 risk we have identified for Dong-Ah Geological Engineering.

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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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