Can Uno&Company.,Ltd.'s (KOSDAQ:114630) Weak Financials Pull The Plug On The Stock's Current Momentum On Its Share Price?

Uno&Company.Ltd's (KOSDAQ:114630) stock is up by a considerable 52% over the past three months. However, in this article, we decided to focus on its weak fundamentals, as long-term financial performance of a business is what ultimatley dictates market outcomes. Particularly, we will be paying attention to Uno&Company.Ltd's ROE today.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. Put another way, it reveals the company's success at turning shareholder investments into profits.

See our latest analysis for Uno&Company.Ltd

How Do You 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 Uno&Company.Ltd is:

3.0% = ₩2.1b ÷ ₩72b (Based on the trailing twelve months to June 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 ₩0.03 in profit.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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 Uno&Company.Ltd's Earnings Growth And 3.0% ROE

As you can see, Uno&Company.Ltd's ROE looks pretty weak. Even when compared to the industry average of 8.4%, the ROE figure is pretty disappointing. Given the circumstances, the significant decline in net income by 49% seen by Uno&Company.Ltd over the last five years is not surprising. We believe that there also might be other aspects that are negatively influencing the company's earnings prospects. For example, the business has allocated capital poorly, or that the company has a very high payout ratio.

However, when we compared Uno&Company.Ltd's growth with the industry we found that while the company's earnings have been shrinking, the industry has seen an earnings growth of 3.5% in the same period. This is quite worrisome.

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. 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 Uno&Company.Ltd's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Uno&Company.Ltd Using Its Retained Earnings Effectively?

Uno&Company.Ltd's declining earnings is not surprising given how the company is spending most of its profits in paying dividends, judging by its LTM (or last twelve month) payout ratio of 59% (or a retention ratio of 41%). With only very little left to reinvest into the business, growth in earnings is far from likely. You can see the 4 risks we have identified for Uno&Company.Ltd by visiting our risks dashboard for free on our platform here.

Moreover, Uno&Company.Ltd has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth.

Summary

Overall, we would be extremely cautious before making any decision on Uno&Company.Ltd. Because the company is not reinvesting much into the business, and given the low ROE, it's not surprising to see the lack or absence of growth in its earnings. Up till now, we've only made a short study of the company's growth data. So it may be worth checking this free detailed graph of Uno&Company.Ltd's past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.

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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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