Is The Market Rewarding Sigdo Koppers S.A. (SNSE:SK) With A Negative Sentiment As A Result Of Its Mixed Fundamentals?

Sigdo Koppers (SNSE:SK) has had a rough three months with its share price down 6.0%. We, however decided to study the company's financials to determine if they have got anything to do with the price decline. Stock prices are usually driven by a company’s financial performance over the long term, and therefore we decided to pay more attention to the company's financial performance. Specifically, we decided to study Sigdo Koppers' 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.

Check out our latest analysis for Sigdo Koppers

How Do You 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 Sigdo Koppers is:

6.6% = US$111m ÷ US$1.7b (Based on the trailing twelve months to September 2020).

The 'return' is the income the business earned over the last year. So, this means that for every CLP1 of its shareholder's investments, the company generates a profit of CLP0.07.

What Is The Relationship Between ROE And 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.

Sigdo Koppers' Earnings Growth And 6.6% ROE

As you can see, Sigdo Koppers' ROE looks pretty weak. Even when compared to the industry average of 8.7%, the ROE figure is pretty disappointing. For this reason, Sigdo Koppers' five year net income decline of 7.1% is not surprising given its lower ROE. We believe that there also might be other aspects that are negatively influencing the company's earnings prospects. For example, the business has allocated capital poorly, or that the company has a very high payout ratio.

Next, when we compared with the industry, which has shrunk its earnings at a rate of 0.7% in the same period, we still found Sigdo Koppers' performance to be quite bleak, because the company has been shrinking its earnings faster than the industry.

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

Is Sigdo Koppers Using Its Retained Earnings Effectively?

Despite having a normal three-year median payout ratio of 47% (where it is retaining 53% of its profits), Sigdo Koppers has seen a decline in earnings as we saw above. So there could be some other explanations in that regard. For instance, the company's business may be deteriorating.

In addition, Sigdo Koppers has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth.

Conclusion

Overall, we have mixed feelings about Sigdo Koppers. Even though it appears to be retaining most of its profits, given the low ROE, investors may not be benefitting from all that reinvestment after all. The low earnings growth suggests our theory correct. Wrapping up, we would proceed with caution with this company and one way of doing that would be to look at the risk profile of the business. You can see the 3 risks we have identified for Sigdo Koppers 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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