Are Poor Financial Prospects Dragging Down HYUNDAI BIOLAND Co.,Ltd (KOSDAQ:052260 Stock?

HYUNDAI BIOLANDLtd (KOSDAQ:052260) has had a rough three months with its share price down 13%. We decided to study the company's financials to determine if the downtrend will continue as the long-term performance of a company usually dictates market outcomes. Particularly, we will be paying attention to HYUNDAI BIOLANDLtd's ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out our latest analysis for HYUNDAI BIOLANDLtd

How To 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 HYUNDAI BIOLANDLtd is:

3.6% = ₩5.5b ÷ ₩154b (Based on the trailing twelve months to September 2020).

The 'return' is the yearly profit. That means that for every ₩1 worth of shareholders' equity, the company generated ₩0.04 in profit.

What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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.

HYUNDAI BIOLANDLtd's Earnings Growth And 3.6% ROE

It is hard to argue that HYUNDAI BIOLANDLtd's ROE is much good in and of itself. Not just that, even compared to the industry average of 4.9%, the company's ROE is entirely unremarkable. For this reason, HYUNDAI BIOLANDLtd's five year net income decline of 2.8% is not surprising given its lower ROE. We believe that there also might be other aspects that are negatively influencing the company's earnings prospects. For instance, the company has a very high payout ratio, or is faced with competitive pressures.

From the 3.4% decline reported by the industry in the same period, we infer that HYUNDAI BIOLANDLtd and its industry are both shrinking at a similar rate.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about HYUNDAI BIOLANDLtd's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is HYUNDAI BIOLANDLtd Efficiently Re-investing Its Profits?

HYUNDAI BIOLANDLtd has a high three-year median payout ratio of 71% (that is, it is retaining 29% of its profits). This suggests that the company is paying most of its profits as dividends to its shareholders. This goes some way in explaining why its earnings have been shrinking. With only a little being reinvested into the business, earnings growth would obviously be low or non-existent. Our risks dashboard should have the 3 risks we have identified for HYUNDAI BIOLANDLtd.

Additionally, HYUNDAI BIOLANDLtd 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.

Conclusion

Overall, we would be extremely cautious before making any decision on HYUNDAI BIOLANDLtd. The company has seen a lack of earnings growth as a result of retaining very little profits and whatever little it does retain, is being reinvested at a very low rate of return. So far, we've only made a quick discussion around the company's earnings growth. You can do your own research on HYUNDAI BIOLANDLtd and see how it has performed in the past by looking at this FREE detailed graph 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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