Is Samsung Electro-Mechanics Co., Ltd.'s(KRX:009150) Recent Stock Performance Tethered To Its Strong Fundamentals?

Most readers would already be aware that Samsung Electro-Mechanics' (KRX:009150) stock increased significantly by 33% over the past 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. Specifically, we decided to study Samsung Electro-Mechanics' ROE in this article.

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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

Check out our latest analysis for Samsung Electro-Mechanics

How To Calculate Return On Equity?

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 Samsung Electro-Mechanics is:

10% = ₩565b ÷ ₩5.5t (Based on the trailing twelve months to March 2020).

The 'return' is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each ₩1 of shareholders' capital it has, the company made ₩0.10 in profit.

Why Is ROE Important For Earnings Growth?

Thus far, we have learnt that ROE measures how efficiently a company is generating its profits. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.

Samsung Electro-Mechanics' Earnings Growth And 10% ROE

On the face of it, Samsung Electro-Mechanics' ROE is not much to talk about. However, the fact that the company's ROE is higher than the average industry ROE of 6.1%, is definitely interesting. This certainly adds some context to Samsung Electro-Mechanics' moderate 7.8% net income growth seen over the past five years. That being said, the company does have a slightly low ROE to begin with, just that it is higher than the industry average. Hence there might be some other aspects that are causing earnings to grow. E.g the company has a low payout ratio or could belong to a high growth industry.

As a next step, we compared Samsung Electro-Mechanics' 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 1.3%.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Samsung Electro-Mechanics''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Samsung Electro-Mechanics Efficiently Re-investing Its Profits?

Samsung Electro-Mechanics has a low three-year median payout ratio of 14%, meaning that the company retains the remaining 86% of its profits. This suggests that the management is reinvesting most of the profits to grow the business.

Moreover, Samsung Electro-Mechanics is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 13%. Therefore, the company's future ROE is also not expected to change by much with analysts predicting an ROE of 11%.

Conclusion

Overall, we are quite pleased with Samsung Electro-Mechanics' performance. Particularly, we like that the company is reinvesting heavily into its business at a moderate rate of return. Unsurprisingly, this has led to an impressive earnings growth. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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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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