Micro Contact Solution Co., Ltd.'s (KOSDAQ:098120) Stock Is Going Strong: Is the Market Following Fundamentals?

Micro Contact Solution (KOSDAQ:098120) has had a great run on the share market with its stock up by a significant 99% over the last three months. 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 Micro Contact Solution's ROE.

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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

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How Do You Calculate Return On Equity?

Return on equity 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 Micro Contact Solution is:

19% = ₩13b ÷ ₩69b (Based on the trailing twelve months to March 2025).

The 'return' is the amount earned after tax over the last twelve months. That means that for every ₩1 worth of shareholders' equity, the company generated ₩0.19 in profit.

See our latest analysis for Micro Contact Solution

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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.

Micro Contact Solution's Earnings Growth And 19% ROE

To begin with, Micro Contact Solution seems to have a respectable ROE. Further, the company's ROE compares quite favorably to the industry average of 7.0%. This certainly adds some context to Micro Contact Solution's exceptional 27% net income growth seen over the past five years. We believe that there might also be other aspects that are positively influencing the company's earnings growth. For instance, the company has a low payout ratio or is being managed efficiently.

As a next step, we compared Micro Contact Solution'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 5.4%.

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. Is Micro Contact Solution fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Micro Contact Solution Efficiently Re-investing Its Profits?

Micro Contact Solution has a really low three-year median payout ratio of 8.5%, meaning that it has the remaining 92% left over to reinvest into its business. So it looks like Micro Contact Solution is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Additionally, Micro Contact Solution has paid dividends over a period of four years which means that the company is pretty serious about sharing its profits with shareholders.

Conclusion

In total, we are pretty happy with Micro Contact Solution's performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Remember, the price of a stock is also dependent on the perceived risk. Therefore investors must keep themselves informed about the risks involved before investing in any company. To know the 1 risk we have identified for Micro Contact Solution visit our risks dashboard for free.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.