Has SMCore.Inc's (KOSDAQ:007820) Impressive Stock Performance Got Anything to Do With Its Fundamentals?

SMCore.Inc (KOSDAQ:007820) has had a great run on the share market with its stock up by a significant 11% over the last month. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. Particularly, we will be paying attention to SMCore.Inc's ROE today.

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.

See our latest analysis for SMCore.Inc

How Is ROE Calculated?

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 SMCore.Inc is:

4.0% = ₩2.8b ÷ ₩71b (Based on the trailing twelve months to June 2020).

The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each ₩1 of shareholders' capital it has, the company made ₩0.04 in profit.

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. 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.

SMCore.Inc's Earnings Growth And 4.0% ROE

It is hard to argue that SMCore.Inc's ROE is much good in and of itself. Even when compared to the industry average of 5.0%, the ROE figure is pretty disappointing. Despite this, surprisingly, SMCore.Inc saw an exceptional 24% net income growth over the past five years. Therefore, there could be other reasons behind this growth. For instance, the company has a low payout ratio or is being managed efficiently.

As a next step, we compared SMCore.Inc'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 14%.

Earnings growth is an important metric to consider when valuing a stock. 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. If you're wondering about SMCore.Inc's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is SMCore.Inc Efficiently Re-investing Its Profits?

The three-year median payout ratio for SMCore.Inc is 31%, which is moderately low. The company is retaining the remaining 69%. By the looks of it, the dividend is well covered and SMCore.Inc is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

While SMCore.Inc has been growing its earnings, it only recently started to pay dividends which likely means that the company decided to impress new and existing shareholders with a dividend.

Summary

On the whole, we do feel that SMCore.Inc has some positive attributes. With a high rate of reinvestment, albeit at a low ROE, the company has managed to see a considerable growth in its earnings. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. You can see the 2 risks we have identified for SMCore.Inc 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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