ENF Technology Co., Ltd.'s (KOSDAQ:102710) Stock's On An Uptrend: Are Strong Financials Guiding The Market?

ENF Technology's (KOSDAQ:102710) stock is up by a considerable 17% over the past three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Specifically, we decided to study ENF Technology's ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View our latest analysis for ENF Technology

How To Calculate Return On Equity?

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 ENF Technology is:

17% = ₩53b ÷ ₩312b (Based on the trailing twelve months to September 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 ₩0.17.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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.

ENF Technology's Earnings Growth And 17% ROE

To start with, ENF Technology's ROE looks acceptable. Especially when compared to the industry average of 8.1% the company's ROE looks pretty impressive. Probably as a result of this, ENF Technology was able to see a decent growth of 10% over the last five years.

Next, on comparing with the industry net income growth, we found that ENF Technology's growth is quite high when compared to the industry average growth of 7.7% in the same period, which is great to see.

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 ENF Technology's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is ENF Technology Using Its Retained Earnings Effectively?

In ENF Technology's case, its respectable earnings growth can probably be explained by its low three-year median payout ratio of 4.2% (or a retention ratio of 96%), which suggests that the company is investing most of its profits to grow its business.

Additionally, ENF Technology has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to drop to 3.4% over the next three years. Regardless, the ROE is not expected to change much for the company despite the lower expected payout ratio.

Conclusion

Overall, we are quite pleased with ENF Technology's performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings.

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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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