Is Huons Co., Ltd.'s (KOSDAQ:243070) Stock's Recent Performance Being Led By Its Attractive Financial Prospects?

Huons (KOSDAQ:243070) has had a great run on the share market with its stock up by a significant 6.1% over the last month. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. In this article, we decided to focus on Huons' ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. 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 Huons

How To Calculate Return On Equity?

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 Huons is:

19% = ₩40b ÷ ₩212b (Based on the trailing twelve months to June 2020).

The 'return' is the amount earned after tax 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 ₩0.19 in profit.

What Is The Relationship Between ROE And 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. 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.

Huons' Earnings Growth And 19% ROE

To begin with, Huons seems to have a respectable ROE. Especially when compared to the industry average of 7.4% the company's ROE looks pretty impressive. This probably laid the ground for Huons' moderate 9.3% net income growth seen over the past five years.

Next, on comparing with the industry net income growth, we found that Huons' reported growth was lower than the industry growth of 13% in the same period, which is not something we like 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. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Huons''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Huons Making Efficient Use Of Its Profits?

Huons has a low three-year median payout ratio of 18%, meaning that the company retains the remaining 82% of its profits. This suggests that the management is reinvesting most of the profits to grow the business.

While Huons 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 is expected to drop to 10% over the next three years. Regardless, the ROE is not expected to change much for the company despite the lower expected payout ratio.

Summary

In total, we are pretty happy with Huons' performance. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a respectable growth in its earnings. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page 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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