Stock Analysis

Has Dong Suh Companies Inc.'s (KRX:026960) Impressive Stock Performance Got Anything to Do With Its Fundamentals?

KOSE:A026960
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Dong Suh Companies (KRX:026960) has had a great run on the share market with its stock up by a significant 47% 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. Specifically, we decided to study Dong Suh Companies' 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. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

Check out our latest analysis for Dong Suh Companies

How Is ROE Calculated?

ROE 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 Dong Suh Companies is:

10% = ₩142b ÷ ₩1.4t (Based on the trailing twelve months to September 2020).

The 'return' refers to a company's earnings over the last year. That means that for every ₩1 worth of shareholders' equity, the company generated ₩0.10 in profit.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.

A Side By Side comparison of Dong Suh Companies' Earnings Growth And 10% ROE

At first glance, Dong Suh Companies' ROE doesn't look very promising. Although a closer study shows that the company's ROE is higher than the industry average of 5.6% which we definitely can't overlook. Still, Dong Suh Companies has seen a flat net income growth over the past five years. Bear in mind, the company does have a slightly low ROE. It is just that the industry ROE is lower. Hence, this goes some way in explaining the flat earnings growth.

When you consider the fact that the industry earnings have shrunk at a rate of 4.5% in the same period, the company's net income growth is pretty remarkable.

past-earnings-growth
KOSE:A026960 Past Earnings Growth February 23rd 2021

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). This then helps them determine if the stock is placed for a bright or bleak future. Is Dong Suh Companies fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Dong Suh Companies Making Efficient Use Of Its Profits?

Dong Suh Companies has a high three-year median payout ratio of 50% (or a retention ratio of 50%), meaning that the company is paying most of its profits as dividends to its shareholders. This does go some way in explaining why there's been no growth in its earnings.

Additionally, Dong Suh Companies has paid dividends over a period of at least ten years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth.

Summary

In total, it does look like Dong Suh Companies has some positive aspects to its business. Namely, its significant earnings growth, to which its moderate rate of return likely contributed. While the company is paying out most of its earnings as dividends, it has been able to grow its earnings in spite of it, so that's probably a good sign. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. To gain further insights into Dong Suh Companies' past profit growth, check out this visualization of past earnings, revenue and cash flows.

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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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