WONIK Materials Co.,Ltd.'s (KOSDAQ:104830) Has Had A Decent Run On The Stock market: Are Fundamentals In The Driver's Seat?

WONIK MaterialsLtd's (KOSDAQ:104830) stock is up by 8.2% over the past three months. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. Particularly, we will be paying attention to WONIK MaterialsLtd'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.

View our latest analysis for WONIK MaterialsLtd

How Is ROE Calculated?

The formula for return on equity is:

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

So, based on the above formula, the ROE for WONIK MaterialsLtd is:

9.0% = ₩30b ÷ ₩329b (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 ₩0.09 in profit.

What Is The Relationship Between ROE And Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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 all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

WONIK MaterialsLtd's Earnings Growth And 9.0% ROE

On the face of it, WONIK MaterialsLtd's ROE is not much to talk about. However, its ROE is similar to the industry average of 8.2%, so we won't completely dismiss the company. Having said that, WONIK MaterialsLtd has shown a modest net income growth of 12% over the past five years. Given the slightly low ROE, it is likely that there could be some other aspects that are driving this growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

As a next step, we compared WONIK MaterialsLtd'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 7.6%.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. Is A104830 fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is WONIK MaterialsLtd Making Efficient Use Of Its Profits?

WONIK MaterialsLtd has a low three-year median payout ratio of 6.6%, meaning that the company retains the remaining 93% of its profits. This suggests that the management is reinvesting most of the profits to grow the business.

While WONIK MaterialsLtd has seen growth in its earnings, it only recently started to pay a dividend. It is most likely that the company decided to impress new and existing shareholders with a dividend. Our latest analyst data shows that the future payout ratio of the company over the next three years is expected to be approximately 5.9%. Still, forecasts suggest that WONIK MaterialsLtd's future ROE will rise to 12% even though the the company's payout ratio is not expected to change by much.

Summary

In total, it does look like WONIK MaterialsLtd has some positive aspects to its business. With a high rate of reinvestment, albeit at a low ROE, the company has managed to see a considerable growth in its earnings. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. 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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