Duksan Hi Metal Co.,Ltd (KOSDAQ:077360) Stock Is Going Strong But Fundamentals Look Uncertain: What Lies Ahead ?

Duksan Hi MetalLtd (KOSDAQ:077360) has had a great run on the share market with its stock up by a significant 42% over the last three months. But the company's key financial indicators appear to be differing across the board and that makes us question whether or not the company's current share price momentum can be maintained. Specifically, we decided to study Duksan Hi MetalLtd's ROE in this article.

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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View our latest analysis for Duksan Hi MetalLtd

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 Duksan Hi MetalLtd is:

7.6% = ₩16b ÷ ₩214b (Based on the trailing twelve months to September 2020).

The 'return' is the income the business earned over the last year. So, this means that for every ₩1 of its shareholder's investments, the company generates a profit of ₩0.08.

What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.

Duksan Hi MetalLtd's Earnings Growth And 7.6% ROE

At first glance, Duksan Hi MetalLtd's ROE doesn't look very promising. However, given that the company's ROE is similar to the average industry ROE of 8.5%, we may spare it some thought. However, Duksan Hi MetalLtd has seen a flattish net income growth over the past five years, which is not saying much. Remember, the company's ROE is not particularly great to begin with. So that could also be one of the reasons behind the company's flat growth in earnings.

Next, on comparing with the industry net income growth, we found that Duksan Hi MetalLtd's reported growth was lower than the industry growth of 11% 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 Duksan Hi MetalLtd's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Duksan Hi MetalLtd Making Efficient Use Of Its Profits?

Summary

In total, we're a bit ambivalent about Duksan Hi MetalLtd's performance. Even though it appears to be retaining most of its profits, given the low ROE, investors may not be benefitting from all that reinvestment after all. The low earnings growth suggests our theory correct. So far, we've only made a quick discussion around the company's earnings growth. So it may be worth checking this free detailed graph of Duksan Hi MetalLtd's past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.

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