Humedix Co., Ltd.'s (KOSDAQ:200670) Stock On An Uptrend: Could Fundamentals Be Driving The Momentum?

Most readers would already be aware that Humedix's (KOSDAQ:200670) stock increased significantly by 11% over the past week. 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. In this article, we decided to focus on Humedix's ROE.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

See our latest analysis for Humedix

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 Humedix is:

9.9% = ₩13b ÷ ₩129b (Based on the trailing twelve months to September 2020).

The 'return' is the profit over the last twelve months. Another way to think of that is that for every ₩1 worth of equity, the company was able to earn ₩0.10 in profit.

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 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.

Humedix's Earnings Growth And 9.9% ROE

When you first look at it, Humedix's ROE doesn't look that attractive. However, the fact that the company's ROE is higher than the average industry ROE of 7.6%, is definitely interesting. Having said that, Humedix's net income growth over the past five years is more or less flat. Remember, the company's ROE is a bit low to begin with, just that it is higher than the industry average. Hence, this goes some way in explaining the flat earnings growth.

We then compared Humedix's net income growth with the industry and found that the average industry growth rate was 14% in the same period.

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Humedix is trading on a high P/E or a low P/E, relative to its industry.

Is Humedix Efficiently Re-investing Its Profits?

In spite of a normal three-year median payout ratio of 45% (or a retention ratio of 55%), Humedix hasn't seen much growth in its earnings. So there could be some other explanation in that regard. For instance, the company's business may be deteriorating.

In addition, Humedix only recently started paying a dividend so the management must have decided the shareholders prefer dividends over earnings growth.

Summary

In total, it does look like Humedix has some positive aspects to its business. Yet, the low earnings growth is a bit concerning, especially given that the company has a respectable rate of return and is reinvesting a huge portion of its profits. By the looks of it, there could be some other factors, not necessarily in control of the business, that's preventing growth. So far, we've only made a quick discussion around the company's earnings growth. You can do your own research on Humedix and see how it has performed in the past by looking at this FREE detailed graph of past earnings, revenue and cash flows.

If you decide to trade Humedix, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.