SEOWONINTECH.Co.,Ltd's (KOSDAQ:093920) Stock On An Uptrend: Could Fundamentals Be Driving The Momentum?

Most readers would already be aware that SEOWONINTECH.Co.Ltd's (KOSDAQ:093920) stock increased significantly by 41% over the past three months. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. Specifically, we decided to study SEOWONINTECH.Co.Ltd'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.

See our latest analysis for SEOWONINTECH.Co.Ltd

How To 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 SEOWONINTECH.Co.Ltd is:

6.9% = ₩12b ÷ ₩170b (Based on the trailing twelve months to September 2020).

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

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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.

SEOWONINTECH.Co.Ltd's Earnings Growth And 6.9% ROE

At first glance, SEOWONINTECH.Co.Ltd's ROE doesn't look very promising. However, the fact that the its ROE is quite higher to the industry average of 5.4% doesn't go unnoticed by us. However, SEOWONINTECH.Co.Ltd's five year net income decline rate was 21%. Remember, the company's ROE is a bit low to begin with, just that it is higher than the industry average. Hence, this goes some way in explaining the shrinking earnings.

However, when we compared SEOWONINTECH.Co.Ltd's growth with the industry we found that while the company's earnings have been shrinking, the industry has seen an earnings growth of 2.3% in the same period. This is quite worrisome.

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. 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 SEOWONINTECH.Co.Ltd is trading on a high P/E or a low P/E, relative to its industry.

Is SEOWONINTECH.Co.Ltd Making Efficient Use Of Its Profits?

In spite of a normal three-year median payout ratio of 46% (that is, a retention ratio of 54%), the fact that SEOWONINTECH.Co.Ltd's earnings have shrunk is quite puzzling. So there could be some other explanations in that regard. For instance, the company's business may be deteriorating.

Moreover, SEOWONINTECH.Co.Ltd has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth.

Conclusion

In total, it does look like SEOWONINTECH.Co.Ltd has some positive aspects to its business. Although, we are disappointed to see a lack of growth in earnings even in spite of a moderate ROE and and a high reinvestment rate. We believe that there might be some outside factors that could be having a negative impact on the business. 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. To know the 2 risks we have identified for SEOWONINTECH.Co.Ltd visit our risks dashboard for free.

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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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