HB SOLUTION Co., Ltd.'s (KOSDAQ:297890) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?

With its stock down 34% over the past three months, it is easy to disregard HB SOLUTION (KOSDAQ:297890). However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. Specifically, we decided to study HB SOLUTION's ROE in this article.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

View our latest analysis for HB SOLUTION

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 HB SOLUTION is:

6.5% = ₩15b ÷ ₩229b (Based on the trailing twelve months to September 2024).

The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every ₩1 worth of equity, the company was able to earn ₩0.07 in profit.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.

HB SOLUTION's Earnings Growth And 6.5% ROE

When you first look at it, HB SOLUTION's ROE doesn't look that attractive. Yet, a closer study shows that the company's ROE is similar to the industry average of 5.8%. Particularly, the exceptional 54% net income growth seen by HB SOLUTION over the past five years is pretty remarkable. Given the slightly low ROE, it is likely that there could be some other aspects that are driving this growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

As a next step, we compared HB 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 9.3%.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. Is HB SOLUTION fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is HB SOLUTION Using Its Retained Earnings Effectively?

HB SOLUTION's ' three-year median payout ratio is on the lower side at 4.9% implying that it is retaining a higher percentage (95%) of its profits. So it looks like HB SOLUTION is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Along with seeing a growth in earnings, HB SOLUTION only recently started paying dividends. Its quite possible that the company was looking to impress its shareholders.

Summary

In total, it does look like HB SOLUTION has some positive aspects to its business. Despite its low rate of return, the fact that the company reinvests a very high portion of its profits into its business, no doubt contributed to its high earnings growth. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. Our risks dashboard would have the 3 risks we have identified for HB SOLUTION.

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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.