Are Strong Financial Prospects The Force That Is Driving The Momentum In Hwaseung Enterprise Co., Ltd.'s KRX:241590) Stock?

Hwaseung Enterprise (KRX:241590) has had a great run on the share market with its stock up by a significant 34% over the last three months. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. Particularly, we will be paying attention to Hwaseung Enterprise's ROE today.

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. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

See our latest analysis for Hwaseung Enterprise

How Do You Calculate Return On Equity?

The formula for ROE is:

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

So, based on the above formula, the ROE for Hwaseung Enterprise is:

11% = ₩58b ÷ ₩540b (Based on the trailing twelve months to June 2020).

The 'return' refers to a company's earnings over the last year. So, this means that for every ₩1 of its shareholder's investments, the company generates a profit of ₩0.11.

What Has ROE Got To Do With 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. 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.

Hwaseung Enterprise's Earnings Growth And 11% ROE

At first glance, Hwaseung Enterprise's ROE doesn't look very promising. Although a closer study shows that the company's ROE is higher than the industry average of 6.1% which we definitely can't overlook. This certainly adds some context to Hwaseung Enterprise's moderate 19% net income growth seen over the past five years. Bear in mind, the company does have a moderately low ROE. It is just that the industry ROE is lower. So there might well be other reasons for the earnings to grow. For example, it is possible that the broader industry is going through a high growth phase, or that the company has a low payout ratio.

As a next step, we compared Hwaseung Enterprise's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 6.8%.

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). Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Hwaseung Enterprise's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Hwaseung Enterprise Making Efficient Use Of Its Profits?

Hwaseung Enterprise has a low three-year median payout ratio of 4.4%, meaning that the company retains the remaining 96% of its profits. This suggests that the management is reinvesting most of the profits to grow the business.

Moreover, Hwaseung Enterprise is determined to keep sharing its profits with shareholders which we infer from its long history of three years of paying a dividend. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 5.1%. Still, forecasts suggest that Hwaseung Enterprise's future ROE will rise to 17% even though the the company's payout ratio is not expected to change by much.

Summary

In total, we are pretty happy with Hwaseung Enterprise's performance. In particular, it's great to see that the company has seen significant growth in its earnings backed by a respectable ROE and a high reinvestment rate. 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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