Spigen Korea Co., Ltd.'s (KOSDAQ:192440) Stock Has Been Sliding But Fundamentals Look Strong: Is The Market Wrong?

With its stock down 4.3% over the past three months, it is easy to disregard Spigen Korea (KOSDAQ:192440). However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. In this article, we decided to focus on Spigen Korea's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

View our latest analysis for Spigen Korea

How Is ROE Calculated?

ROE 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 Spigen Korea is:

19% = ₩64b ÷ ₩342b (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 ₩0.19 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. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.

Spigen Korea's Earnings Growth And 19% ROE

To begin with, Spigen Korea seems to have a respectable ROE. On comparing with the average industry ROE of 8.4% the company's ROE looks pretty remarkable. This probably laid the ground for Spigen Korea's moderate 6.1% net income growth seen over the past five years.

As a next step, we compared Spigen Korea'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 2.4%.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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 Spigen Korea is trading on a high P/E or a low P/E, relative to its industry.

Is Spigen Korea Efficiently Re-investing Its Profits?

In Spigen Korea's case, its respectable earnings growth can probably be explained by its low three-year median payout ratio of 16% (or a retention ratio of 84%), which suggests that the company is investing most of its profits to grow its business.

Along with seeing a growth in earnings, Spigen Korea only recently started paying dividends. Its quite possible that the company was looking to impress its shareholders. Our latest analyst data shows that the future payout ratio of the company is expected to rise to 22% over the next three years. Therefore, the expected rise in the payout ratio explains why the company's ROE is expected to decline to 15% over the same period.

Conclusion

On the whole, we feel that Spigen Korea's performance has been quite good. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. Having said that, on studying current analyst estimates, we were concerned to see that while the company has grown its earnings in the past, analysts expect its earnings to shrink in the future. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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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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