V-One Tech Co., Ltd.'s (KOSDAQ:251630) Stock is Soaring But Financials Seem Inconsistent: Will The Uptrend Continue?

Most readers would already be aware that V-One Tech's (KOSDAQ:251630) stock increased significantly by 11% over the past three months. However, we decided to pay attention to the company's fundamentals which don't appear to give a clear sign about the company's financial health. Particularly, we will be paying attention to V-One Tech's ROE today.

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. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

See our latest analysis for V-One Tech

How Is ROE Calculated?

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 V-One Tech is:

7.4% = ₩6.3b ÷ ₩85b (Based on the trailing twelve months to September 2020).

The 'return' is the amount earned after tax over the last twelve months. So, this means that for every ₩1 of its shareholder's investments, the company generates a profit of ₩0.07.

What Has ROE Got To Do With Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.

V-One Tech's Earnings Growth And 7.4% ROE

On the face of it, V-One Tech's ROE is not much to talk about. Yet, a closer study shows that the company's ROE is similar to the industry average of 8.5%. Still, V-One Tech has seen a flat net income growth over the past five years. Bear in mind, the company's ROE is not very high. So that could also be one of the reasons behind the company's flat growth in earnings.

We then compared V-One Tech's net income growth with the industry and found that the average industry growth rate was 11% in the same period.

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). 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 V-One Tech is trading on a high P/E or a low P/E, relative to its industry.

Is V-One Tech Making Efficient Use Of Its Profits?

V-One Tech has a low three-year median payout ratio of 23% (or a retention ratio of 77%) but the negligible earnings growth number doesn't reflect this as high growth usually follows high profit retention.

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

Summary

Overall, we have mixed feelings about V-One Tech. 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 V-One Tech'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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