Can Mixed Fundamentals Have A Negative Impact on JCH Systems, Inc. (KOSDAQ:033320) Current Share Price Momentum?

JCH Systems (KOSDAQ:033320) has had a great run on the share market with its stock up by a significant 8.9% over the last month. However, we wonder if the company's inconsistent financials would have any adverse impact on the current share price momentum. Particularly, we will be paying attention to JCH Systems' ROE today.

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

See our latest analysis for JCH Systems

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 JCH Systems is:

7.2% = ₩6.8b ÷ ₩95b (Based on the trailing twelve months to September 2020).

The 'return' is the profit over the last twelve months. That means that for every ₩1 worth of shareholders' equity, the company generated ₩0.07 in profit.

What Is The Relationship Between ROE And Earnings Growth?

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

JCH Systems' Earnings Growth And 7.2% ROE

When you first look at it, JCH Systems' ROE doesn't look that attractive. However, given that the company's ROE is similar to the average industry ROE of 6.1%, we may spare it some thought. We can see that JCH Systems has grown at a five year net income growth average rate of 3.1%, which is a bit on the lower side. Bear in mind, the company's ROE is not very high . So this could also be one of the reasons behind the company's low growth in earnings.

As a next step, we compared JCH Systems' net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 3.8% in the same period.

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. 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 JCH Systems is trading on a high P/E or a low P/E, relative to its industry.

Is JCH Systems Using Its Retained Earnings Effectively?

JCH Systems doesn't pay any dividend currently which essentially means that it has been reinvesting all of its profits into the business. This doesn't explain the low earnings growth number that we discussed above. Therefore, there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.

Summary

On the whole, we feel that the performance shown by JCH Systems can be open to many interpretations. 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.

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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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