DAIHAN Scientific Co., Ltd.'s (KOSDAQ:131220) Stock Is Going Strong: Is the Market Following Fundamentals?

DAIHAN Scientific (KOSDAQ:131220) has had a great run on the share market with its stock up by a significant 206% over the last three months. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. In this article, we decided to focus on DAIHAN Scientific's ROE.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

See our latest analysis for DAIHAN Scientific

How Do You 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 DAIHAN Scientific is:

7.1% = ₩2.4b ÷ ₩33b (Based on the trailing twelve months to June 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.

Why Is ROE Important For 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. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

A Side By Side comparison of DAIHAN Scientific's Earnings Growth And 7.1% ROE

When you first look at it, DAIHAN Scientific's ROE doesn't look that attractive. However, the fact that the company's ROE is higher than the average industry ROE of 5.6%, is definitely interesting. Even more so after seeing DAIHAN Scientific's exceptional 38% net income growth over the past five years. Bear in mind, the company does have a moderately low ROE. It is just that the industry ROE is lower. Therefore, the growth in earnings could also be the result of other factors. E.g the company has a low payout ratio or could belong to a high growth industry.

Next, on comparing with the industry net income growth, we found that DAIHAN Scientific's growth is quite high when compared to the industry average growth of 3.4% in the same period, which is great to see.

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. 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 DAIHAN Scientific is trading on a high P/E or a low P/E, relative to its industry.

Is DAIHAN Scientific Using Its Retained Earnings Effectively?

DAIHAN Scientific's three-year median payout ratio is a pretty moderate 29%, meaning the company retains 71% of its income. By the looks of it, the dividend is well covered and DAIHAN Scientific is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

While DAIHAN Scientific has seen growth in its earnings, it only recently started to pay a dividend. It is most likely that the company decided to impress new and existing shareholders with a dividend.

Summary

On the whole, we feel that DAIHAN Scientific's performance has been quite good. In particular, it's great to see that the company has seen significant growth in its earnings backed by a respectable ROE and a high reinvestment rate. 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. Let's not forget, business risk is also one of the factors that affects the price of the stock. So this is also an important area that investors need to pay attention to before making a decision on any business. To know the 1 risk we have identified for DAIHAN Scientific 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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