Can Mixed Fundamentals Have A Negative Impact on Semiconductor Manufacturing International Corporation (HKG:981) Current Share Price Momentum?

Semiconductor Manufacturing International (HKG:981) has had a great run on the share market with its stock up by a significant 8.4% over the last month. But the company's key financial indicators appear to be differing across the board and that makes us question whether or not the company's current share price momentum can be maintained. In this article, we decided to focus on Semiconductor Manufacturing International's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Put another way, it reveals the company's success at turning shareholder investments into profits.

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How Do You Calculate Return On Equity?

Return on equity 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 Semiconductor Manufacturing International is:

3.1% = US$990m ÷ US$32b (Based on the trailing twelve months to March 2025).

The 'return' is the yearly profit. That means that for every HK$1 worth of shareholders' equity, the company generated HK$0.03 in profit.

Check out our latest analysis for Semiconductor Manufacturing International

What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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.

Semiconductor Manufacturing International's Earnings Growth And 3.1% ROE

It is quite clear that Semiconductor Manufacturing International's ROE is rather low. Even compared to the average industry ROE of 4.1%, the company's ROE is quite dismal. Therefore, Semiconductor Manufacturing International's flat earnings over the past five years can possibly be explained by the low ROE amongst other factors.

We then compared Semiconductor Manufacturing International's net income growth with the industry and found that the average industry growth rate was 4.2% in the same 5-year 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. Doing so will help them establish if the stock's future looks promising or ominous. What is 981 worth today? The intrinsic value infographic in our free research report helps visualize whether 981 is currently mispriced by the market.

Is Semiconductor Manufacturing International Using Its Retained Earnings Effectively?

Semiconductor Manufacturing International doesn't pay any regular dividends, meaning that potentially all of its profits are being reinvested in the business. However, this doesn't explain why the company hasn't seen any growth. So there could be some other explanations in that regard. For instance, the company's business may be deteriorating.

Conclusion

In total, we're a bit ambivalent about Semiconductor Manufacturing International's performance. 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. With that said, we studied the latest analyst forecasts and found that while the company has shrunk its earnings in the past, analysts expect its earnings to grow 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. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.