RN2 Technologies Co., Ltd.'s (KOSDAQ:148250) Stock's On An Uptrend: Are Strong Financials Guiding The Market?

RN2 Technologies' (KOSDAQ:148250) stock is up by a considerable 56% over the past three months. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. Specifically, we decided to study RN2 Technologies' 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. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out our latest analysis for RN2 Technologies

How Is ROE Calculated?

The formula for return on equity is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for RN2 Technologies is:

8.3% = ₩2.8b ÷ ₩34b (Based on the trailing twelve months to September 2020).

The 'return' is the yearly profit. So, this means that for every ₩1 of its shareholder's investments, the company generates a profit of ₩0.08.

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. 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.

A Side By Side comparison of RN2 Technologies' Earnings Growth And 8.3% ROE

When you first look at it, RN2 Technologies' ROE doesn't look that attractive. Although a closer study shows that the company's ROE is higher than the industry average of 5.4% which we definitely can't overlook. Still, RN2 Technologies' net income growth of 4.2% over the past five years was mediocre at best. Bear in mind, the company does have a low ROE. It is just that the industry ROE is lower. So that could be one of the factors that are causing earnings growth to stay low.

We then compared RN2 Technologies' net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 2.3% 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. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about RN2 Technologies''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is RN2 Technologies Using Its Retained Earnings Effectively?

Conclusion

Overall, we are quite pleased with RN2 Technologies' performance. 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. You can see the 3 risks we have identified for RN2 Technologies by visiting our risks dashboard for free on our platform here.

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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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